The term “open mouth operations” sounds mildly horrifying, doesn’t it? It makes us think of root canals, or of feeding frenzies in shark-infested waters. Both of those earn a big “nope” from us. But we can all relax, because its real meaning is far less dramatic.
An “open mouth operation” is simply an announcement made by the Federal Reserve when it wants to take action to influence interest rates, inflation, exchange rates, and/or the U.S. money supply.
The Reserve doesn’t even usually end up taking that action, because the markets tend to correct course toward whatever the Fed wanted anyway. Like...if they issue an open mouth operating stating their intent to lower interest rates, the market tends to react to and prepare for that action. Those reactions and preparations actually end up lowering the interest rate all by themselves, and the Fed didn’t have to do anything except say they wanted to lower it.
Of course, there is some speculation about how many times the Federal Reserve can say they’re going to do something and not do it before the open mouth operation effect wears off...but so far, it seems to work like a charm pretty much every time.
Image source: https://www.vitatanden.se/