Wall Street focused on Fed

NEW YORK (CNNMoney.com) -- The Dow added a few points Friday, rising at the end of a volatile session in which investors weighed downgrades of American Express and Intel and a weak retail sales report ahead of next week's Federal Reserve meeting.

The Dow Jones industrial average (up 27.72 to 13,452.60, Charts) rose 0.1 percent, according to early tallies. The broader S&P 500 (up 0.87 to 1,484.82, Charts) index ended the session little changed, as did the tech-heavy Nasdaq composite (up 1.40 to 2,602.46, Charts).

Stocks slipped in the early going after the retail sales report raised worries that the problems in housing and credit markets are spreading to the broader economy. But the selling pressure proved erratic as the session wore on, with investors turning their focus to Tuesday's Fed policy meeting.

Trading volume was light due to Rosh Hashanah, the Jewish New Year.

Treasury prices were little changed and the dollar was mixed versus other major currencies. Oil prices slipped after ending the previous session at a record high.

Here's a look at what was moving near the close.

Retail sales rose just 0.3 percent in August, from an upwardly revised 0.5 percent in July. Economists surveyed by Briefing.com thought sales would rise 0.5 percent.

Excluding autos, retail sales fell 0.4 percent in August after rising an upwardly revised 0.7 percent in July. Economists thought sales excluding autos would rise 0.2 percent in August, on average.

The report seemed to speak to fears that ongoing problems in the credit and mortgage markets are spreading to consumer spending, which fuels roughly two-thirds of economic growth.

A separate report showed a weaker-than-expected rise in industrial production.

However, the retail sales news was countered by other more positive items, including a report showing that consumer sentiment rebounded a little in September after a drop in August.

The University of Michigan's consumer sentiment index rose to 83.8 in September from 83.4 in August. Economists thought it would rise to 83.5.

In addition, Wall Streeters could be figuring that the weak retail sales report makes it more likely that the Federal Reserve will cut a key short-term interest rate by a half-percentage point when it meets next week.

"Everyone's waiting for the Fed," said Harry Clark, founder and CEO of Clark Capital Management Group.

The fed funds rate has stood at 5.25 percent since June 2006, with the central bank seeking to balance inflationary pressure with the risks of an economic slowdown sparked by the housing market collapse.

The recent rise in mortgage defaults and the tightening of credit have raised bets on Wall Street that the central bank will have to cut interest rates. The Fed has already cut the discount rate, which affects bank loans, and has added billions to the banking system.

Wall Streeters are now looking for the Fed to cut the fed funds rate, which impacts consumer loans, with the current debate about the extent of the cut.

Should Ben Bernanke and the central bankers opt to cut rates by 25 basis points, stock investors would likely be disappointed, Clark said, since such a cut is already expected. There are 100 basis points in one percentage point.

Should the bankers not cut rates at all, stocks would likely tumble, he said, as it would send the message that the bank is behind the curve.

Clark said a half-percentage point would be best, alongside an additional half-percentage point cut for the discount rate and a reassuring statement.

"I think they have to cut 50 - 25 would seem wishy-washy, but 50 says they are serious, they are taking care of it," he said.

(For more on the debate, click here.)

In other news, the Bank of England had to approve emergency funding for lender Northern Rock, reminding investors of the threat of a global liquidity crunch.

A hedge fund run by Goldman Sachs (up $2.15 to $190.62, Charts, Fortune 500) suffered a big loss in August, according to a published report. Several other Goldman funds have suffered big declines this summer due to the financial market woes.

Merrill Lynch (down $0.45 to $74.69, Charts, Fortune 500) said that its debt investments will hit its third-quarter results.

Among other stock movers, Dow components American Express (down $1.60 to $59.00, Charts, Fortune 500) and Intel (down $0.40 to $24.95, Charts, Fortune 500) both slipped on Merrill Lynch downgrades.

Oracle (down $0.40 to $20.05, Charts, Fortune 500) and Dell (down $0.48 to $26.41, Charts, Fortune 500) were among the large technology stocks falling.

ImClone (down $4.40 to $39.08, Charts) slumped after an analyst at Friedman, Billings, Ramsey downgraded the biotech stock and cut its 12-month price target.

Market breadth was negative and volume was pretty light. On the New York Stock Exchange, losers beat winners by a narrow margin on volume of 900 million shares. On the Nasdaq, decliners topped advancers by five to 4 on volume of 1.26 billion shares.

Treasury prices rose, with the yield on the 10-year note at 4.46 percent little changed from late Thursday. Bond prices and yields move in opposite directions.

U.S. light crude oil for October delivery fell 99 cents to settle at $79.10 a barrel on the New York Mercantile Exchange after ending the previous session at a record closing high.

However, the record price is still below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today. Oil prices have advanced about 30 percent in 2007.

In currency trading, the dollar inched higher against the euro after falling to a record low on Thursday. The greenback was weaker against the yen.