Question

what point is there too much intervention by the FED into monetary policy in the economy?

Answer 1

It is important to note that monetary policy is critical at times when the economy is witnessing a deep recession or rampant inflation. Just as an example, during the financial crisis of 2008-09, the federal reserve intervened in the economy through expansionary monetary policies. The federal reserve cut interest rates to near-zero levels and ensured that banks have ample liquidity. This helped in stabilizing the financial system and also helped trigger credit growth in the medium-term. Therefore, at times, the intervention of the federal reserve is critical. However, if the federal reserve resorts to higher intervention in the economy, it might be counter productive than productive.

Just as an example, the federal reserve has been increasing interest rates since December 2015 and rates have moved higher even as inflation remains subdued. More frequent changes in interest rate (by impacting the federal fund rates) creates uncertainty in the economy. To elaborate, businesses might be unsure about pursuing leveraged investment spending and consumers might also hold back from leveraged consumption spending on interest rate uncertainty.

Therefore, more intervention through changes in money supply, change in federal fund rate and influencing the interest rates in the economy can negatively impact the dynamic sectors of the economy (private and household) sectors. However, it is worth noting that the federal reserve has take a status-quo stance with the central bank ready to be "patient" before any further rate hike as global economic conditions remain uncertain. Some degree of certainty is positive for the economy and financial markets.