Open Mouth Operations (Moral Suasion)

Open mouth operations—also called moral suasion or “jawboning”—are the use of public or private rhetorical pressure by authorities (typically central banks) to influence behavior and expectations without direct intervention or coercion. Instead of changing policy instruments like interest rates or balance sheets, officials seek to shape market and public sentiment through statements, signalling, and meetings.

How it works

• Verbal signals: speeches, press conferences, minutes, and interviews communicate policymakers’ intentions and readiness to act.
• Private persuasion: behind-the-scenes meetings with banks, firms, or market participants to encourage desired actions.
• Implicit threats or promises: suggesting future policy steps if markets or institutions do not behave as hoped.

These tactics rely on credibility. If market participants believe authorities will follow through, words alone can alter expectations and behavior.

Why central banks use it

• Limited tools: when conventional instruments (e.g., interest-rate cuts, balance-sheet expansion) are constrained, communication becomes a primary tool.
• Cost effectiveness: persuading markets can avoid costly or risky interventions.
• Signalling: clarifies central bank objectives and can anchor inflation or growth expectations.

Communication styles and risks

Central banks vary in how explicit they are. “Fedspeak” traditionally meant careful, ambiguous language to avoid misinterpretation. More recent leaders have favored clearer communication to manage expectations. The trade-off:
* Clear messages can guide markets effectively.
* Overconfidence or mixed signals can backfire—either by failing to curb undesirable trends or by creating moral hazard (expectations of intervention).

Notable examples

Alan Greenspan (1996) — His warning about “irrational exuberance” is a classic public attempt to influence asset-price behavior. Critics later argued such talk was insufficient to prevent the 2000 collapse.
Mario Draghi (2012) — The European Central Bank president’s pledge to do “whatever it takes” to preserve the euro is credited with stabilizing markets and is a high-profile instance of effective moral suasion.
Long-Term Capital Management (1998) — The New York Fed convened major banks and encouraged a private-sector rescue of the highly leveraged hedge fund LTCM. The Fed coordinated but did not fund the bailout; banks provided financing to avoid fire-sale contagion. This is an example of behind-the-scenes persuasion leading to collective action.

When it’s most likely to be used

• Near-zero interest-rate environments or when balance-sheet expansion has limits.
• Periods of financial stress where direct intervention would be costly or politically fraught.
• Situations requiring quick shaping of expectations to avert self-fulfilling market panics.

Key takeaways

• Open mouth operations are persuasion-based tools used to influence expectations and behavior without direct policy action.
• They depend on credibility and clear communication; effectiveness varies with the audience’s belief in follow-through.
• Moral suasion can be a cost-effective alternative to intervention, but it carries risks such as insufficient impact or encouraging dependency on verbal support.

Open mouth operations remain an integral part of modern central-bank toolkit, especially when traditional monetary policy levers are constrained.