Open Mouth Operations

DEFINITION of 'Open Mouth Operations'

Open mouthed operations are speculative measures taken by the Federal Reserve to influence interest rates and inflation through the sale or purchase of U.S Treasury bonds. Open mouth operations can be thought of as the central bank announcements that let markets know where the central banks prefer interest rates to be. The potential use of open market operations by the central bank to attain this target interest rate normally causes the market to react and adjust interest rates without the central bank actually having to take action.

BREAKING DOWN 'Open Mouth Operations'

The main difference between open mouth operations and open market operations is that the former deals with the intent while the latter refers to the action. Selling U.S Treasury Bonds decreases the cash deposits held in banks, thus reducing the money supply, and increases interest rates. Increased interest rates discourage banks from extending credit, temporarily slowing down economic progress.

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  5. How do open market operations affect the money supply of an economy?

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