Former Federal Reserve chairs Ben Bernanke and Janet Yellen are recommending that the central bank continue trying to shore up the economy against the coronavirus threat, even suggesting that it go beyond the powers it now has.
In a Financial Times essay, the two say the Fed should look for more authority that would give it the power to purchase corporate bonds on top of the Treasurys and mortgage-backed securities it already plans to buy.
"The Fed's intervention could help restart that part of the corporate debt market, which is under significant stress," Bernanke and Yellen wrote. "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."
Yellen and Bernanke served during the financial crisis, the latter as chairman and the former as head of the San Francisco Fed. Back then, they helped roll out a number of innovative programs aimed at recapitalizing the banking industry and getting money flowing through the financial system again to businesses and households.
The Fed already has deployed several of those tools, moving Tuesday into credit operations for commercial paper and another for primary dealers that buy Treasurys directly from the government and use the liquidity to fund credit for businesses and households. That's on top of a $1 trillion a day foray into the overnight repo markets where banks go for short-term funding and longer-term bond purchases.
Getting into corporate debt and its higher levels of risk, though, requires congressional approval.
The two former chairs recommend that the Fed buy "limited amounts of investment-grade corporate debt" and pointed out that other global central banks already have that authority.
Bernanke and Yellen are not the first to recommend that the Fed go further out on the risk curve — some have suggested it buy into the equity market through exchange-traded funds — but the idea does seem to be gaining steam as the coronavirus crisis worsens. Boston Fed President Eric Rosengren in a recent speech suggested doing so.
"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," Bernanke and Yellen wrote. Though they said the Fed has done much so far, "there is more that the central bank should consider doing as it helps Congress reduce the long-run effects of the downturn."