26 Nov 2008

Fed announces $US800b stimulus

6:00 am on 26 November 2008

The Federal Reserve is to inject another $US800 billion into the United States economy in a further effort to stabilise the financial system.

Treasury Secretary Henry Paulson said the stimulus package aimed to make more lending available to consumers.

About $US600 billion will be used to buy mortgage-backed securities while $US200 billion is being targeted at unfreezing the consumer credit market.

Financial institutions are reluctant to lend, deepening the economic slowdown.

The situation has been exacerbated as the credit crisis has worsened.

Mr Paulson said key lending such as credit cards, car loans and student loans essentially came to a halt in October. He added that the new measures were aimed at getting these types of lending back to more normal levels.

The announcement came as Commerce Department figures showed US economic output shrank between July and September at a faster pace than initially predicted.

GDP fell at an annual rate of 0.5% in the third-quarter - from the 0.3% estimated a month ago - as consumers cut spending by the largest amount in 28 years.

Under the latest rescue plan - which is in addition to a $US700 billion federal bank bail-out - the Fed is to buy up to $US100 billion in debt from the troubled mortgage agencies Fannie Mae and Freddie Mac.


The Fed said it would also buy another $US500 billion in mortgage-backed securities - pools of mortgages that are bundled together and sold to investors.

The Fed said that the $US600 billion effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability.

It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months.

In addition, the Fed also announced a separate programme to help unfreeze the consumer debt market.

The Fed will lend up to $US200billion to the holders of securities backed by various types of consumer loans, such as credit cards and student loans.

The crisis began more than a year ago with rising defaults on sub-prime mortgages, loans provided to borrowers with weak credit histories.