THE Federal Reserve is to inject another £526.8 billion into the US economy in a further effort to stabilise the financial system, it emerged yesterday.
Henry Paulson, the US treasury secretary, said yesterday that the $800 billion stimulus was aimed at making more lending available to consumers. In total, Washington has committed $7 trillion.
About £390 billion of the latest cash will be used
to buy up mortgage-backed securities, while about £130 billion is being targeted at unfreezing the consumer credit market.
The latest injection is even bigger than a $700 billion (£380 billion) bail-out – the previous biggest in US history – which failed to steady fearful stock markets when it was announced in September.
Financial institutions are reluctant to lend, deepening the economic slowdown, and global leaders have warned that unless credit is made available, the recession will be deeper and longer than anticipated.
However, the latest stimulus package received a mixed reception on Wall Street. The Dow Jones industrials average of blue chip firms finished about 36 points up, at the 8,479 mark, on its third day of successive gains.
Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania, said: "The ultimate question is, 'Is this keeping lines of credit open?' What you need to preserve is existing lending. If they still are calling in loans of good, credit-worthy customers, then the Fed is going to have to take more action."
The US government's commitments to contain the financial crisis, which engulfed the country and dominated the presidential election, now approach $7 trillion. Under the latest rescue plan, the Fed is to buy up to £65 billion of debt from troubled mortgage giants Fannie Mae and Freddie Mac.
It will buy another £324 billion in mortgage-backed securities – pools of mortgages that are bundled together and sold to investors.
The Fed said it was trying to reduce the cost of mortgages and increase their availability. The purchases of the mortgages and securities would take place over a number of months.
The Fed also said it would lend up to £130 billion to the holders of securities backed by various types of consumer loans, such as credit cards and student loans. Mr Paulson said key lending such as credit cards, car loans and student loans had come to a halt in October, and the measures were aimed at getting them back to normal.
Todd Abraham, of Federated Investors, Pittsburgh, said: "They are getting to the heart of the problem: it's clean, it's quick, it's direct."
