Janet Yellen and Ben Bernanke call on the Fed to avoid long-term economic damage from coronavirus pandemic. 'The economy may take a very long time to recover.'

• Former US Federal Reserve chairs Janet Yellen and Ben Bernanke have called for the Fed to widen its arsenal of responses to the coronavirus pandemic.
• The two former central bankers indicated that the US economy could suffer long term consequences and recession if steps are not taken to improve conditions.
• The Fed has already stepped in with a $700 billion package to supply liquidity to financial markets which have cratered following uncertainty around COVID-19.

Former US Federal Reserve chairs Janet Yellen and Ben Bernanke have called for the Fed to widen its arsenal of responses to the coronavirus pandemic.

Yellen, the most recent chair of the Federal Reserve, and Bernanke, who presided over the US central bank during the 2008 financial crisis indicated that additional measures would need to be taken by the Fed to avoid long-term economic damage, in an op-ed in the Financial Times.

"Ideally, when the effects of the virus pass, people will go back to work, to school, to the shops, and the economy will return to normal," they wrote. "In that scenario, the recession may be deep, but at least it will have been short. 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."

The pair indicated that the Fed's immediate reaction to coronavirus, a $700 billion package to buy US Treasuries and mortgage-backed securities (MBS) and a 50bp reduction to its short-term policy rate, might not be sufficient.

While the response was deemed similar to the Fed's reaction in 2008, the underlying conditions are different they argued. More than 200,000 people have been infected by coronavirus worldwide with more than 4,000 cases in the US alone and 75 deaths, per CDC.

Yellen and Bernanke call for the Federal Reserve to take steps similar to those taken by the European Central Bank and the Bank of England to buy investment grade corporate debt, as a boost to financial markets.

"To avoid permanent damage from the virus-induced downturn, it is important to ensure that credit is available for otherwise sound borrowers who face a temporary period of low income or revenues," they wrote. In addition, they added that the Fed's discount window - it's lending to banks - while having more attractive terms may not be as effective as a Term Auction Facility, which auctions funds to banks.

Similarly, the pair called for short term repo facilities and low-cost financing facilities for banks to lend to small businesses. A repo or a repurchase agreement is a form of sort-term borrowing for dealers in government securities.

"Central bank tools cannot eliminate the direct costs of the virus, including the suffering and loss it will create. However, the Fed can help mitigate the economic effects of the outbreak, particularly by assuring that, once the virus's direct effects are controlled, the economy can rebound quickly," they concluded.