It was unprecedented in the history of central banking: intervention without limits. The pledges this spring by the U.S. Federal Reserve, the European Central Bank and some of their counterparts to make a seemingly infinite ocean of money available to fight the disruption caused by the coronavirus marked a dramatic expansion of their traditional role. Central banks became backstops to entire economies. Their swift action calmed financial markets, leading to rebounds in many asset prices. But even central bank leaders acknowledge that restoring economic growth is more than they can do alone.
The traditional tool of central banking is its control over interest rates. The Fed’s first response to the crisis was to bring its main interest rate back to near zero in March; the ECB and Bank of Japan were already below zero. Central banks also ramped up bond-buying programs, known as quantitative easing, to pull down long-term rates. But it wasn’t enough.
