The Federal Reserve hardly responds to market conditions. Their free and open printing of money is arguably the greatest risk to our economy. Milton Friedman has great resources on this, including a video series from the 1970s (based on clothing alone) called Free to Choose. Its on Youtube, amongst other places.
If republicans think that unemployment benefits compete with private businesses on labor, then I get to think that 0% interest money competes with labor for capital.
The fundamental problem is that the 0% lower bound combined with a deposit guarantee represents not only a minimum wage for capital. It also presents a job guarantee. A minimum wage doesn't guarantee you a job.
So yes, the Federal Reserve is not responding to market conditions at all. It's artificially holding up interest rates at zero or above. This is causing massive distortions in the economy that can only be fixed by a swiss-army knife of policies. Among one of the needed responses is "free and open printing of money". The world economy is already flirting with disinflation (a reduction in inflation). If you don't have negative interest rates you will need a whole load of "money printing" to keep the system standing in place.
The assumption that a scarce money system (i.e. guaranteed non negative interest) has a fixed velocity of money is absurd. Put interest at -5% and just watch everyone withdraw cash from their bank account. The velocity of cash would be basically be zero and the velocity of money on bank accounts would be extremely high. As the government is doing deficit spending all the money just piles up somewhere and ends up doing nothing. QE is even worse because you cannot spend centralbank reserves to buy groceries.
Ok, let's do the negative interest thing. It sounds like a big hassle right? Just think about the benefits: The first step after negative interest ratess would be to adjust the inflation target to 0% meaning perfect price stability. Actually, you wouldn't target inflation at all because the negative interest rate completely replaces the need for inflation. You would target the CPI itself meaning your goal as the government would be to maintain a CPI of 100 for all eternity. Any deviation would become inexcusable. Meanwhile today inflation is a hack to make a broken money system work.
Natural boom-and-bust cycles are a huge risk to economies as well, despite the fact that they're natural and don't have anyone for which we can point a finger at.
I don't know what you mean by "natural boom and bust cycles" but credit cycles and other financial cycles are just a property of the money system. Alternative money systems do not have this property.
The cycles only make sense because people like and want them. I.e. they love the scarcity of money. For example, in a depression the return on money is greater than the return on labor, people logically flock to money rather than labor even though real wealth is eroding as people stop working.
