WASHINGTON - THE Federal Reserve announced plans on Tuesday to pump up to US$800 billion (S$1.2 trillion) into the financial system in purchases of mortgage- and asset-backed securities.

The US central bank said it would launch purchases of up to US$100 billion of obligations of housing-related government-sponsored enterprises including Fannie Mae and Freddie Mac in the next week, and buy another US$500 billion in a process started by the end of this year.

Separately, the Fed said it would launch a program to buy up to US$200 billion in asset-backed securities - backed by student loans, auto loans, credit card loans, and other loans - in a further effort to unclog frozen credit markets.

The US Treasury said it was allocating US$20 billion to the asset-backed securities fund.

'The asset-backed securities market provides liquidity to financial institutions that provide small business loans and consumer lending such as auto loans, student loans, and credit cards,' Treasury said in a statement.

The statement noted that these securities amounted to US$240 billion in 2007 but had dropped sharply in the third quarter of 2008 'before essentially coming to a halt in October,' making it harder for consumers to get credit and threatening a seizing up of economic activity.

According to the Fed statement, '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 Fed said the action on mortgage securities 'is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.' -- AFP