What Is Market Intervention?

When people hear of market intervention, sometimes they assume the stock market has been rigged and you have to be high up in a corporate structure to benefit. But that's rarely the case and the government does intervene in financial markets from time to time.

Permanent open market operations (POMO) is something the Federal Reserve (effectively the U.S. central bank) enacts to buy U.S. Treasury Bonds through its New York arm, the New York Fed. It buys these bonds from bond dealers, who in turn buy riskier assets, such as stocks. This is done to boost asset prices.

The President's Working Group On Capital Markets (or the Plunge Protection Team, as some call it) was formed by President Reagan after the stock market crash of 1987 to give recommendations for legislative and private sector solutions to maintain investor confidence. It consists of the Treasury Secretary, the Chairman of the Federal Reserve, Chairman of the Securities and Exchange Commission (SEC) and the Chairman of the Commodity Futures Trading Commission (CFTC). People have speculated they buy futures when the markets are down sharply, but no one outside the group knows for sure what they do as their actions are deliberately confidential.

The Federal Reserve intervenes in the marketplace by lowering its federal funds rate, which is designed to lower the interest rate paid on bank funds and increase spending and investment in the economy.