In an effort to lower home-mortgage rates, the Fed said that it would buy up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. It will also purchase up to $500 billion in mortgage-backed securities, pools of mortgages that are sold to investors.
To boost consumer spending, the Fed will provide up to $200 billion to investors who offer credit card, auto and student loans to consumers, as well as some small business loans.
"They're trying to put funds into the system, trying to unfreeze these markets," former St. Louis Fed president William Poole told Bloomberg Television. "Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk."
The lending program will be partially backed by $20 billion from the Treasury Department's $700 billion bailout fund.
"By providing liquidity to issuers of consumer asset-backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending enabling borrowers to have access to lower cost consumer finance and small business loans," Treasury Secretary Henry Paulson told reporters of the new measures.
The announcement came on a day of grim economic news. The Commerce Department issued a report Tuesday that found that the gross domestic product shrank at a .5 percent annual rate between July and September. That's worse than the preliminary estimate of a 0.3 percent decline issued last month, and it's the economy's worst performance since the second quarter of 1980.
Consumer confidence rose in November as gas prices fell, but Americans' views on the economy remain the gloomiest in decades as they grapple with massive layoffs, slumping home prices and dwindling retirement funds.
The New York-based Conference Board said Tuesday its Consumer Confidence Index now stands at 44.9, up from a revised 38.8 in October. Last month's reading was the lowest since the research group started tracking the index in 1967.
Meanwhile, a report on home prices released Tuesday showed further deterioration in the housing market, another sign that doesn't bode well for consumer spending. The Standard & Poor's/Case-Shiller U.S. National Home Price Index said that home prices tumbled a record 16.6 percent during the third quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.
The markets, however, opened higher Tuesday morning on news of the Fed's new programs. The Dow Jones industrial average was up 110 points, or 1.3 percent, and the Standard & Poor's 500 Index rose 12.8 points, or 1.5 percent.