The latest initiative from the U.S. Federal Reserve Board, which targets private sector borrowing costs, should help alleviate the credit crunch, BCA Research says.

Earlier this week the Fed announced the creation of the Term Asset-Backed Securities Loan Facility, which will lend up to US$200 billion to holders of AAA-rated securities backed by newly and recently originated consumer and small business loans. It will also will purchase up to US$100 billion in debt from the government-sponsored mortgage entities, and up to US$500 billion in GSE-backed mortgage securities.

“There is little hope of an economic recovery when the cost of borrowing to the private sector is prohibitively high, so these Fed measures are crucial,” BCA says in a research note. “In particular, the authorities must target lower mortgage rates to support the housing market.”

“The Fed’s purchase program may need to grow, but is an important step,” it says. “No doubt, banks will remain under pressure to deleverage for some time and lending standards will remain tight. However, risk aversion should moderate and the severe credit crunch should ease if investors see lower private sector borrowing rates and some improvement in final demand via fiscal stimulus.”

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U.S. Treasury, Fed move to boost lending (I )