GM-CSF promotes myelopoiesis and inflammation, and GM-CSF blockade is being evaluated as a treatment for COVID-19-associated hyperinflammation. Alveolar GM-CSF is, however, required for monocytes to differentiate into alveolar macrophages (AMs) that control alveolar homeostasis. By mapping cross-species AM development to clinical lung samples, we discovered that COVID-19 is marked by defective GM-CSF-dependent AM instruction and accumulation of pro-inflammatory macrophages. In a multi-center, open-label RCT in 81 non-ventilated COVID-19 patients with respiratory failure, we found that inhalation of rhu-GM-CSF did not improve mean oxygenation parameters compared with standard treatment. However, more patients on GM-CSF had a clinical response, and GM-CSF inhalation induced higher numbers of virus-specific CD8 effector lymphocytes and class-switched B cells, without exacerbating systemic hyperinflammation. This translational proof-of-concept study provides a rationale for further testing of inhaled GM-CSF as a non-invasive treatment to improve alveolar gas exchange and simultaneously boost antiviral immunity in COVID-19. This study is registered at ClinicalTrials.gov (NCT04326920) and EudraCT (2020-001254-22).