May 1, 2020 - Economy & Business

Central banks load up for a long war against coronavirus

Dion Rabouin, author of Markets

Illustration: Aïda Amer/Axios

The world's most powerful central banks made clear this week that they expect the economic damage from the coronavirus pandemic to be deep and long-lasting and they are arming themselves for war.

Why it matters: We are entering an uncharted era of central banking that will see the Fed and its peers lend money directly to businesses, take unprecedented risks and directly support tremendous portions of the global economy.

  • "There are a number of concerns but I think the attitude of central banks right now is 'Damn the torpedoes, full speed ahead,'" Kathy Jones, chief fixed-income strategist at Charles Schwab, tells Axios.

Driving the news: After announcing Wednesday that it would do whatever it takes and then some to buoy the U.S. economy, the Fed unveiled a beefed-up new version of its $600 billion Main Street Lending Program that will effectively shred parts of the 1913 Federal Reserve Act (with authorization from the Treasury Department).

  • That followed announcements from the European Central Bank and Bank of Japan in the preceding two days for massive lending and bond-buying programs that would be increased, in ECB president Christine Lagarde's words, “by as much as necessary and for as long as needed."

The big picture: Central banks were established to keep inflation in line and to use their lending powers only to purchase assets backed by their governments.

  • However, since the BOJ first began a quantitative easing program to prop up Japan's economy, central banks have been providing more and more support.
  • The world's central banks currently hold around $25 trillion of financing on their balance sheets and have committed to do everything from invest in companies with junk credit ratings to buy stocks.

The bottom line: This is not what central banks were designed to do, but in the face of this historic economic shock and in the absence of clear alternatives, it is what they are doing.

  • No one is quite sure what happens next.

Go deeper: The Fed goes to war with coronavirus

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