After deploying almost $9 trillion, crisis fighters face new dilemmas

WHEN Tottenham Hotspur striker Son Heung-Min put the ball in the back of the net early in the second half against Crystal Palace in April of last year, he etched his name into history as the first player to score at his soccer club’s glistening new 62,000-seat north London home. Less than a year after his team’s triumphant 2-0 win that day, the £1-billion ($1.3-billion) stadium sat eerily empty as a coronavirus lockdown brought sports, and much of normal life, to a halt across the UK.

Then came another milestone. In June, Spurs became the first club in the English Premier League to qualify for Bank of England (BoE) support. It tapped a £175-million commercial-paper facility to help cushion the estimated loss of more than £200 million in revenue from canceled matches and other events between then and June 2021.

If BoE support for Spurs sounds improbable, it shouldn’t. The central bank was hardly the only one to mount extraordinary rescue operations in response to the pandemic. In less exceptional circumstances, that money would be used to bail out banks or other lenders to stave off financial contagion. With COVID-19 hammering economies, that changed this year.

For the first time in its history, the US Federal Reserve bought a wide variety of corporate debt issued by blue-chip borrowers such as Apple, Inc., as well as junk bonds from riskier companies. The Bank of Japan, the petri dish for central banking after more than two decades of extraordinary stimulus, launched a $940-billion package of loan support for businesses.

Those moves are just a few examples of how central banks are digging deeper and deeper into their monetary toolboxes to cushion the COVID-19-induced shock to the global economy. The pandemic cast aside the notion that the banks were already at full stretch. Instead, it’s accelerated the transformation of monetary mandarins focused on inflation into guardians combating inequality, climate change, and more— leaving less and less scope for a return to a simpler existence.

It’s a policy spiral that began after the 2008 financial crisis and has shoved central banks more profoundly into politically treacherous territory. “The more tasks you give to central banks, the more they’re dealing with trade-offs associated with political choices,” says Stephen King, senior economic adviser at HSBC Holdings Plc. “In the old days, monetary policy was very much a story about price stability. One tool: interest rates. One objective: price stability. Easy!”

As the virus spread, central banks from Washington to Wellington flooded financial markets with liquidity. They backstopped companies. They helped to finance massive government stimulus. The blitz included 164 interest-rate cuts in 147 days, according to a tally by Bank of America Corp.; altogether, the banks pumped in $8.5 trillion in monetary support and governments an additional $11.4 trillion in fiscal stimulus — almost $20 trillion in total.

What made the rescue all the more remarkable was this: Before the pandemic struck, a pressing concern at gatherings such as those in Davos, Switzerland, and Jackson Hole, Wyo., was that central banks were in no shape to fight a crisis given that interest rates were already so low. Not everyone was convinced pouring more cheap liquidity into financial markets would work again, given that a decade of easy money hadn’t been enough to ward off the threat of secular stagnation.

But within weeks of the central banks’ interventions this year, global markets began to recover, and by August stocks worldwide had reached record highs, powered in large part by the ultra-easy money. “The global track record and responses to the current pandemic show that central banks have very extensive capabilities to shape financial conditions,” says Philip Lane, an executive board member of the European Central Bank who, as ECB chief economist, crafts policies including its €1.4-trillion ($1.65-trillion) pandemic bond-buying program.

What’s less clear is whether the real economy will get the same kind of boost. That’s why Mr. Lane’s boss, ECB President Christine Lagarde, warned European governments that failure to pump in fiscal stimulus risked an economic calamity.

Similarly, Fed Chairman Jerome Powell has spoken of the limits to the US central bank’s abilities, stressing that it can lend money but not spend it. Prior to the pandemic, Mr. Powell was justly proud of the job the bank had done in managing the economy. By pushing the unemployment rate to a half-century low of 3.5%, the Fed was allowing the benefits of the record-long US economic expansion to reach many Americans who’ve historically been left behind. Black and Latino unemployment fell to the lowest levels on record. Americans with disabilities or prison records — long shut out of the labor market — were finding jobs.

Then “the world turned upside down,” as Amanda Cage, a workforce development expert, told Mr. Powell at a Fed Listens public outreach event in May. Unemployment was spiking to levels not seen since the Great Depression. Lowpaid minority and women workers were being particularly hard hit — a development Mr. Powell called “heartbreaking.”

Ms. Cage, president and chief executive officer of the National Fund for Workforce Solutions, based in Washington, says she fears many of the millions of jobs lost in the hospitality and healthcare sectors during the crisis won’t be coming back — jobs disproportionately held by workers of color. She also says she sees another “tsunami” of job losses coming at state and local governments, a sector where, again, Black workers are overrepresented. “The crisis has shone a light on the disparities that were there before but most people were blind to,” Ms. Cage says.

Patrick “Duke” Dujakovich, a former firefighter and now president of the Greater Kansas City AFL-CIO, also participated in the May Fed Listens event. A member of the board of the Federal Reserve Bank of Kansas City, he praises the central bank for its response to the COVID-19 crisis. But he has a message from workers. “We talk about price stability and stability in all the financial markets, but we never talk about employment stability,” he says. “Maybe that should be one of the focuses.”