Fed makes two-step €800bn move to help free up credit
Henry Paulson, US treasury secretary, takes a question during a news briefing yesterday
The US Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses.
The central bank will purchase as much as $600bn in debt issued or backed by government-chartered housing-finance companies. It will also set up a programme of $200bn to support consumer and small-business loans, the Fed said.
With the announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.
Starting
William Poole, the former St Louis Fed president said: "They're trying to put funds into the system, trying to unfreeze these markets."
"Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk."
The Fed will purchase up to $100bn in direct debt of mortgage lenders Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and up to $500bn of mortgage-backed securities, the statement said.
Treasury Secretary Henry Paulson said that $200bn is just the "starting point" for the asset-backed securities program.
"The economy is turning down pretty dramatically," he said. "It's very important that lending continues to be available."
Official figures yesterday showed the US economy shrank at an annual rate of 0.5pc in the third quarter of this year. The figure was in line with forecasts by economists and reflected weaker consumer spending, exports and government spending. The White House called the data "troubling".
The report reflected an abrupt shift from annual growth of 2.8pc in the second quarter, although analysts said that figure was skewed by a surge in exports and consumer spending boosted by once-off tax rebates.
Many economists say the downturn in the fourth quarter could be much worse, reflecting a credit crunch and ongoing troubles in housing and manufacturing. Separate figures showed that US consumer confidence improved moderately in November from a record low in October, with the 'present situation' index slipping slightly but the expectations index improving.
The Conference Board's consumer confidence index stood at 44.9 in November, up from 38.8 in October. Inflation expectations subsided considerably as a result of falling petrol prices, said Lynn Franco, director of the Conference Board's consumer research centre. "Despite the improvement in the expectations index in November, consumers remain extremely pessimistic," she said.
(Bloomberg)
- Scott Lanman
