US Treasury Secretary Henry Paulson (left) and Federal Reserve Chairman Ben Bernanke seen appearing before the Senate Banking Committee September 23.

The United States Federal Reserve will provide as much as US$900 billion in cash loans to squeezed banks in an urgent effort Monday to break through a dangerous credit clog that threatens the US economy and has unhinged financial markets around the globe.

The action by the US central bank is aimed at spurring spooked financial institutions, which are hoarding cash, to lend not only to each other but also to individuals and businesses.

The lending lock-up is a key reason why the US economy is faltering. Unable to borrow money freely or forced to pay a high cost to borrow, employers are cutting jobs and reducing capital investments. Consumers have retrenched.

To better open the lending spigots, the Fed said 28-day and 84-day cash loans being made available to banks will be boosted to US$150 billion a piece, effective Monday.

Outstanding amounts

Those increases will eventually bring the amounts outstanding under the programme to US$600 billion.

Loans that will be made available in November to banks also will be increased to US$150 billion each.

That makes a total of US$900 billion in credit potentially outstanding over year end, the Fed said.

The Fed also said it will begin paying interest on commercial banks' reserves, another way to expand the central bank's resources to battle the credit crisis.

Congress in the US$700 billion bailout bill President George W. Bush signed on Friday gave the Fed the power to pay interest on those reserves for the first time.

The law accelerated the effective date to October 9 of this year, down from October of 2011.

- AP