US moves to reduce interest rate spreads, stimulate lending

The US Federal Reserve has announced a further round of initiatives it hopes will stimulate the ailing US economy.

In this round of stimuli, the Federal Reserve has focused on increasing the availability of credit for homebuyers, small business owners and other consumers.

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It has created a ‘term asset-backed securities loan facility’ (TALF), which will support the issuance of asset-backed securities collateralised by student, auto and credit card loans, among others.

Under the program, the Federal Reserve Bank of New York will lend up to $200 billion to holders of certain AAA-rated asset-backed securities backed by the newly originated consumer and small business loans. The US Treasury will provide $20 billion of credit protection to the Federal Reserve Bank in connection with the program.

The TALF has been designed to increase credit availability and support economic activity by encouraging increased issuance of consumer and small business asset-backed securities at more normal interest rate spreads. The asset-backed securities markets have historically funded a substantial share of consumer credit and small business loans.

“Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of US economic activity,” the Federal Reserve said.

The Federal Reserve has also announced it will purchase the direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae, as well as their mortgage-backed securities.

The aim is to reduce the cost and increase the availability of credit for homebuyers. The Federal Reserve hopes the initiative will support housing markets “and foster improved conditions in financial markets more generally”.

Purchases of up to $100 billion of direct obligations will take place via auctions that will begin next week, while purchases of up to $500 billion of mortgage-backed securities will be conducted by asset managers. Both purchases are expected to take place over several quarters, the Federal Reserve said.