In a new series on the “economic cures” for the coronavirus, the Financial Times is offering insights from leading commentators and policymakers on “how to alleviate a devastating global slowdown”. This article, co-authored by Ben Bernanke and Janet Yellen, discusses the role the Fed must play to reduce long-term damage.

Here are highlights:

• The Fed’s recent actions of lowering interest rates (to nearly zero) and preparing to purchase $700 billion in Treasury debt and mortgage-backed securities are “superficially similar to those taken by monetary policymakers during the 2008 financial crisis,” but today’s challenges are “quite different.”
• The current crisis is not stemming from the financial markets, which are only “reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence.”
• The economy could rebound quickly, but that “isn’t the only possible scenario: if critical economic relationships are disrupted by months of low activity, the economy may take a very long time to recover.”
• To stave off permanent economic damage, the Fed must ensure that credit is available for “otherwise sound borrowers who face a temporary period of low income or revenues.”
• The Fed can enlist the following options:
  • Use an alternative discount window program such as the Term Auction Facility (that was used during the financial crisis to entice banks to access funding);
  • Provide cash to a wider range of lenders (against various forms of collateral) through additional credit programs—like it did during the financial crisis;
  • Explore low-cost financing facilities for banks to support lending to households and small businesses adversely affected by the pandemic.
  • Restart the Term Asset-Backed Lending Facility, a program undertaken in 2008 to provide credit  to households and businesses by supporting the issuance of asset-backed securities collateralized by loans to businesses and consumers affected by the financial crisis.
  • Ask Congress for the authority to buy limited amounts of investment-grade corporate debt. “The Fed’s intervention could help restart that part of the corporate debt market which is under significant stress,” the article argues, adding, “Such a program would have to be carefully calibrated to minimize the credit risk taken by the Fed while still providing needed liquidity to an essential market.”

The article concludes that, although central bank tools can’t eliminate the effects of the coronavirus, the Fed can “help mitigate the economic effects of this outbreak” by assuring that once it’s direct impact is controlled, “the economy can rebound quickly.”