The Fed will lend up to $200 billion to spur consumer lending - for autos, education, credit cards and other things. The bold program, dubbed the Term Asset-Backed Securities Loan Facility, was first announced late last year and originally scheduled to start in February.
Participants - companies and investors that pledge eligible collateral to back the loan - must request the new government loans by March 17. The Fed will provide the three-year loans on March 25.
The Fed said the program has the potential to generate up to $1 trillion of lending for businesses and households.
"The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities," the Fed and Treasury Department said in a joint statement. "The TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy."
Under the program, the Fed will buy securities backed by different types of debt including credit card, auto, student and small business loans. The credit crunch - the worst since the 1930s - has made it much more difficult for people to obtain such financing , and those that do can be socked with high rates.
Meanwhile, Federal Reserve Chairman Ben Bernankethat any hope for an economic recovery will hinge on the government's ability to prop up shaky financial markets.
The effectiveness of a string of radical actions taken by the Fed, the Treasury Department and other agencies to stabilize markets "will be critical determinants of the timing and strength of the recovery," Bernanke said in testimony prepared for the Senate Budget Committee.
The Fed plans to keep the program running through December, but said it could be extended.
Treasury Secretary Timothy Geithner announced an expansion of the Fed's program on Feb. 10, saying it also will include support for commercial mortgage-backed securities. The central bank said teams from Treasury and the Fed are now analyzing the right terms for the commercial real-estate component.
The Fed and Treasury currently anticipate that securities backed by car fleet leases as well as certain equipment - including for heavy construction and for agriculture - will be eligible for Fed funding in its April operation.
Participants in the second round of funding must request the government loans by April 7, which the Fed will disburse on April 14.
The program, the Fed said, will remain focused on securities that will have the greatest impact to aid the troubled economy and shaky financial markets and that can be added at a low risk to the government.