The US Federal Reserve unveiled an $800 billion plan last night to buy mortgage-related debt and back consumer loans as it tries to revive the US lending market and steer the global economy away from a deep recession.
As the Fed announced its move, the United States posted the sharpest fall in gross domestic product since 2001, likely joining Europe in recession, while China's economy is now expected to grow next year at the slowest pace since 1990.
Mining company BHP Billiton's $66 billion bid for rival Rio Tinto became the latest corporate casualty of global economic turmoil, with BHP blaming the financial crisis and sliding metals prices.
The Fed's move is intended to strike at the heart of US economic woes, the collapsed housing market. The resulting meltdown in the high-risk mortgage market engulfed the world and caused the worst financial crisis in 80 years, freezing access to credit, sparking bank collapses and requiring the bailout of entire countries.
The latest actions mean the US government now faces a possible bill as high as $8.3 trillion from various programs to prop up the financial system, revive loan markets and rescue faltering companies. That is more than half last year's US gross domestic product, about $14 trillion.
President-elect Barack Obama announced his top budget officials on Tuesday and promised significant spending cuts to partially offset the costly stimulus package.
Under its latest massive life-support intervention for the US financial system, the Fed is planning a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to support consumer debt securities.
Investors generally welcomed the Fed's latest move, although some worried that injecting more dollars into the financial system would spur inflation.
US large cap stocks ended higher after European and Asian stocks gained. Oil fell sharply to below $51 a barrel while the US dollar slumped against the euro and the Japanese yen.
Global data and sentiment surveys confirmed the depth and breadth of the problems. The US economy shrank more severely during the third quarter than first estimated as consumers cut spending at the steepest rate in 28 years, according to a Commerce Department report.
It revised the annual rate of decline in third-quarter gross domestic product to 0.5 percent from 0.3 percent, the sharpest fall in GDP since the third quarter of 2001 when the September 11 attacks against the United States took place.
Prices of US single-family homes also plunged a record 17.4 per cent in September from a year earlier, according to a key index released yesterday.
The European Commission will propose measures today to stimulate the recession-hit European economy including VAT cuts and a call for lower European Central Bank rates.
REUTERS