Moral suasion (often shortened to “suasion” or called “jawboning” in the U.S.) is the use of persuasive rhetoric, pressure, or implicit threats to influence behavior instead of direct coercion or force. In economics and finance it most commonly describes how central banks and regulators try to shape market or institutional behavior by talking—and by private persuasion—rather than by using formal policy tools such as open market operations or mandatory regulation (Investopedia).
Key takeaways
– Moral suasion is persuasion by words or private pressure rather than direct policy action. (Investopedia)
– Central banks use suasion publicly (speeches, press conferences) and privately (meetings, calls) to influence markets and institutions. (Investopedia; Federal Reserve History)
– It can be effective when the persuader is credible, but it creates limits (credibility risk, moral hazard, ambiguous signals). (Investopedia; Congressional Research Service)
– Famous examples: Alan Greenspan’s “irrational exuberance” warning (1996), the New York Fed’s coordination in the LTCM bailout (1998), and Mario Draghi’s “whatever it takes” pledge (2012). (Investopedia; Federal Reserve Board; Federal Reserve History; ECB)
Understanding moral suasion: how and why it’s used
What central banks are trying to do
– Change expectations (e.g., about inflation, rates, liquidity) so private actors adjust behavior in ways consistent with policy goals.
– Stabilize markets without deploying balance-sheet tools or statutory powers—especially when those tools are limited or politically costly.
– Encourage private sector solutions to problems that might otherwise prompt government intervention.
Common forms of suasion
– Public rhetoric: speeches, testimonies, interviews, press conferences. Example: Greenspan’s “irrational exuberance” remark. (Federal Reserve Board)
– “Open-mouth operations”: deliberate verbal interventions intended to move markets without changing policy instruments. (Investopedia)
– Private persuasion: regulators’ meetings with banks, informal phone calls, coordinated signaling to creditors (example: New York Fed convening banks during LTCM). (Federal Reserve History; Congressional Research Service)
– Implicit threats or promises: signaling a willingness to intervene (or not) can change market behavior (e.g., Draghi’s “whatever it takes”). (European Central Bank)
Advantages and typical uses
– Low-cost and politically less fraught than direct intervention.
– Fast: words can be deployed immediately when markets move.
– Flexible: can be targeted (private calls) or broad (public speeches).
– Useful when traditional tools are constrained (e.g., near-zero policy rates or limited balance-sheet flexibility). (Investopedia; FRED interest rate history)
Limitations and risks
– Credibility is everything: empty rhetoric can backfire and reduce future influence.
– Ambiguity may be misread—too much “Fedspeak” or “constructive ambiguity” undermines clarity and predictability. (Investopedia; De Pooter, 2021)
– Moral hazard: repeated private rescues or strong public rhetoric signaling support can encourage risk-taking (the “too big to fail” problem). (Federal Reserve History; Congressional Research Service)
– Political and legal concerns: private pressure on firms or banks raises transparency and accountability questions.
– When verbal tools are overused in lieu of needed policy action, they may fail to restore stability.
Notable examples
– Greenspan’s “irrational exuberance” (1996): a public warning about overvalued asset markets that is widely cited as a classic use of suasion; critics later argued more forceful measures might have been warranted before the early-2000s collapse. (Federal Reserve Board; The New York Times)
– LTCM (1998): The New York Fed convened major creditor banks, coordinated a private-sector bailout of Long-Term Capital Management, and thereby pressured banks to contribute to a $3.6 billion rescue without public funds; this avoided an immediate market collapse but raised “too big to fail” concerns. (Federal Reserve History; Congressional Research Service)
– Draghi’s “whatever it takes” (2012): the ECB president’s pledge to preserve the euro calmed markets and helped stabilize the eurozone in a sovereign-debt crisis. (European Central Bank)
“Fedspeak” and communication regimes
– Historically, central bankers varied between “constructive ambiguity” (Greenspan’s stance) and greater transparency/clarity (Bernanke and Yellen introduced/expanded press conferences and clearer communication). The effectiveness of suasion depends on how the communication strategy affects credibility and expectations. (Investopedia; De Pooter, 2021; Coibion et al., 2022)
Fast fact
– Long-Term Capital Management (LTCM) was leveraged roughly 30:1 in 1997; a consortium of 14 banks provided a $3.6 billion private sector rescue arranged by the New York Fed in 1998. (Federal Reserve History; Congressional Research Service)
Practical steps — how to use and respond to moral suasion
For central bankers and regulators (how to deploy suasion effectively)
1. Define clear objectives
– Be explicit about the behavior you want to change and why—e.g., reduce leverage, lower inflation expectations, calm short-term funding stress.
2. Assess and build credibility
– Tie rhetoric to a credible policy backstop: make it clear you have tools and will use them if words fail.
3. Use the right channel
– Public signals (speeches, press conferences) when you want broad market expectation shifts; private meetings when targeting specific institutions or avoiding market panic.
4. Coordinate privately when needed
– Convene key institutions to agree on actions (as with LTCM) to produce rapid private solutions without direct public financing.
5. Calibrate ambiguity vs clarity
– Use unambiguous language when you need predictable market responses; reserve ambiguity when flexibility serves policy goals.
6. Monitor market reaction and be ready to follow through
– Track asset prices, funding spreads, and real-world impacts; if suasion fails, be prepared to use policy tools.
7. Document and be transparent ex post
– Explain what was said and why to preserve accountability and reduce moral hazard.
For banks and private institutions (how to respond)
1. Treat suasion seriously but verify
– Assess whether messages reflect real policy intent and contingency plans.
2. Maintain documentation and legal counsel
– Record meetings and guidance to clarify obligations and liabilities.
3. Coordinate risk management
– Stress-test exposures that the regulator may be targeting; prepare contingency solutions.
4. Avoid over-reliance on implied public support
– Assume public backstops are uncertain to reduce moral-hazard incentives.
For investors and market participants (how to interpret jawboning)
1. Gauge credibility
– Consider the speaker’s track record, institutional constraints, and whether the message is backed by policy tools.
2. Look for follow-through signals
– Private meetings, regulatory actions, or subsequent policy changes increase the credibility of prior rhetoric.
3. Diversify and hedge where rhetoric is ambiguous
– If uncertainty about the policy response exists, reduce concentrated exposures that would be harmed by policy inaction.
4. Monitor market indicators
– Funding spreads, volatilities, and central-bank balance sheets provide signals whether words are effective.
Legal, ethical, and systemic considerations
– Moral suasion can be an efficient first line of defense, but repeated private rescues or strong signaling of bailouts can produce moral hazard and raise fairness concerns.
– Transparency, ex post accountability, and clear policy frameworks can mitigate ethical and legal concerns while preserving the tool’s flexibility. (Congressional Research Service)
Conclusion
Moral suasion is a powerful, low-cost tool in central-bank and regulatory toolkits. It works best when the persuader has credibility and is prepared to act if talk fails. But it has limits: ambiguous messages can be misread, overuse can create moral hazard, and words cannot always substitute for policy action. For central banks, suasion is complementary to conventional instruments—but its appropriate use requires careful calibration, monitoring, and transparency.
Sources and further reading
– Investopedia. “Moral Suasion.” https://www.investopedia.com/terms/m/moralsuasion.asp
– Federal Reserve Board. Remarks by Chairman Alan Greenspan, December 5, 1996: “The Challenge of Central Banking in a Democratic Society.”
– The New York Times. “Searching for a Culprit in the Collapse of 2000.”
– Coibion, Olivier, et al. “Monetary Policy Communications and their Effects on Household Inflation Expectations.” Journal of Political Economy, vol. 130, no. 6, June 2022.
– De Pooter, Michiel. “Questions and Answers: The Information Content of the Post-FOMC Meeting Press Conference.” Economic Research: FEDS Notes, October 12, 2021.
– Federal Reserve History. “Near Failure of Long-Term Capital Management.”
– Congressional Research Service. “Systemic Risk And The Long-Term Capital Management Rescue.”
– European Central Bank. “Verbatim of the remarks made by Mario Draghi: Speech… at the Global Investment Conference in London, 26 July 2012.”
– Federal Reserve Bank of St. Louis (FRED). “Federal Funds Effective Rate.”
If you’d like, I can:
– Summarize these points into a two-page memo for policymakers, or
– Create an investor checklist to evaluate whether a central bank’s public statements are likely to be effective.
,
What Is Moral Suasion?
Moral suasion (often shortened to “suasion” or called “jawboning” in the U.S.) is the use of persuasive rhetoric, pressure, or implicit threats to influence behavior instead of direct coercion or force. In economics and finance it most commonly describes how central banks and regulators try to shape market or institutional behavior by talking—and by private persuasion—rather than by using formal policy tools such as open market operations or mandatory regulation (Investopedia).
Key takeaways
– Moral suasion is persuasion by words or private pressure rather than direct policy action. (Investopedia)
– Central banks use suasion publicly (speeches, press conferences) and privately (meetings, calls) to influence markets and institutions. (Investopedia; Federal Reserve History)
– It can be effective when the persuader is credible, but it creates limits (credibility risk, moral hazard, ambiguous signals). (Investopedia; Congressional Research Service)
– Famous examples: Alan Greenspan’s “irrational exuberance” warning (1996), the New York Fed’s coordination in the LTCM bailout (1998), and Mario Draghi’s “whatever it takes” pledge (2012). (Investopedia; Federal Reserve Board; Federal Reserve History; ECB)
Understanding moral suasion: how and why it’s used
What central banks are trying to do
– Change expectations (e.g., about inflation, rates, liquidity) so private actors adjust behavior in ways consistent with policy goals.
– Stabilize markets without deploying balance-sheet tools or statutory powers—especially when those tools are limited or politically costly.
– Encourage private sector solutions to problems that might otherwise prompt government intervention.
Common forms of suasion
– Public rhetoric: speeches, testimonies, interviews, press conferences. Example: Greenspan’s “irrational exuberance” remark. (Federal Reserve Board)
– “Open-mouth operations”: deliberate verbal interventions intended to move markets without changing policy instruments. (Investopedia)
– Private persuasion: regulators’ meetings with banks, informal phone calls, coordinated signaling to creditors (example: New York Fed convening banks during LTCM). (Federal Reserve History; Congressional Research Service)
– Implicit threats or promises: signaling a willingness to intervene (or not) can change market behavior (e.g., Draghi’s “whatever it takes”). (European Central Bank)
Advantages and typical uses
– Low-cost and politically less fraught than direct intervention.
– Fast: words can be deployed immediately when markets move.
– Flexible: can be targeted (private calls) or broad (public speeches).
– Useful when traditional tools are constrained (e.g., near-zero policy rates or limited balance-sheet flexibility). (Investopedia; FRED interest rate history)
Limitations and risks
– Credibility is everything: empty rhetoric can backfire and reduce future influence.
– Ambiguity may be misread—too much “Fedspeak” or “constructive ambiguity” undermines clarity and predictability. (Investopedia; De Pooter, 2021)
– Moral hazard: repeated private rescues or strong public rhetoric signaling support can encourage risk-taking (the “too big to fail” problem). (Federal Reserve History; Congressional Research Service)
– Political and legal concerns: private pressure on firms or banks raises transparency and accountability questions.
– When verbal tools are overused in lieu of needed policy action, they may fail to restore stability.
Notable examples
– Greenspan’s “irrational exuberance” (1996): a public warning about overvalued asset markets that is widely cited as a classic use of suasion; critics later argued more forceful measures might have been warranted before the early-2000s collapse. (Federal Reserve Board; The New York Times)
– LTCM (1998): The New York Fed convened major creditor banks, coordinated a private-sector bailout of Long-Term Capital Management, and thereby pressured banks to contribute to a $3.6 billion rescue without public funds; this avoided an immediate market collapse but raised “too big to fail” concerns. (Federal Reserve History; Congressional Research Service)
– Draghi’s “whatever it takes” (2012): the ECB president’s pledge to preserve the euro calmed markets and helped stabilize the eurozone in a sovereign-debt crisis. (European Central Bank)
“Fedspeak” and communication regimes
– Historically, central bankers varied between “constructive ambiguity” (Greenspan’s stance) and greater transparency/clarity (Bernanke and Yellen introduced/expanded press conferences and clearer communication). The effectiveness of suasion depends on how the communication strategy affects credibility and expectations. (Investopedia; De Pooter, 2021; Coibion et al., 2022)
Fast fact
– Long-Term Capital Management (LTCM) was leveraged roughly 30:1 in 1997; a consortium of 14 banks provided a $3.6 billion private sector rescue arranged by the New York Fed in 1998. (Federal Reserve History; Congressional Research Service)
Practical steps — how to use and respond to moral suasion
For central bankers and regulators (how to deploy suasion effectively)
1. Define clear objectives
– Be explicit about the behavior you want to change and why—e.g., reduce leverage, lower inflation expectations, calm short-term funding stress.
2. Assess and build credibility
– Tie rhetoric to a credible policy backstop: make it clear you have tools and will use them if words fail.
3. Use the right channel
– Public signals (speeches, press conferences) when you want broad market expectation shifts; private meetings when targeting specific institutions or avoiding market panic.
4. Coordinate privately when needed
– Convene key institutions to agree on actions (as with LTCM) to produce rapid private solutions without direct public financing.
5. Calibrate ambiguity vs clarity
– Use unambiguous language when you need predictable market responses; reserve ambiguity when flexibility serves policy goals.
6. Monitor market reaction and be ready to follow through
– Track asset prices, funding spreads, and real-world impacts; if suasion fails, be prepared to use policy tools.
7. Document and be transparent ex post
– Explain what was said and why to preserve accountability and reduce moral hazard.
For banks and private institutions (how to respond)
1. Treat suasion seriously but verify
– Assess whether messages reflect real policy intent and contingency plans.
2. Maintain documentation and legal counsel
– Record meetings and guidance to clarify obligations and liabilities.
3. Coordinate risk management
– Stress-test exposures that the regulator may be targeting; prepare contingency solutions.
4. Avoid over-reliance on implied public support
– Assume public backstops are uncertain to reduce moral-hazard incentives.
For investors and market participants (how to interpret jawboning)
1. Gauge credibility
– Consider the speaker’s track record, institutional constraints, and whether the message is backed by policy tools.
2. Look for follow-through signals
– Private meetings, regulatory actions, or subsequent policy changes increase the credibility of prior rhetoric.
3. Diversify and hedge where rhetoric is ambiguous
– If uncertainty about the policy response exists, reduce concentrated exposures that would be harmed by policy inaction.
4. Monitor market indicators
– Funding spreads, volatilities, and central-bank balance sheets provide signals whether words are effective.
Legal, ethical, and systemic considerations
– Moral suasion can be an efficient first line of defense, but repeated private rescues or strong signaling of bailouts can produce moral hazard and raise fairness concerns.
– Transparency, ex post accountability, and clear policy frameworks can mitigate ethical and legal concerns while preserving the tool’s flexibility. (Congressional Research Service)
Conclusion
Moral suasion is a powerful, low-cost tool in central-bank and regulatory toolkits. It works best when the persuader has credibility and is prepared to act if talk fails. But it has limits: ambiguous messages can be misread, overuse can create moral hazard, and words cannot always substitute for policy action. For central banks, suasion is complementary to conventional instruments—but its appropriate use requires careful calibration, monitoring, and transparency.
Sources and further reading
– Investopedia. “Moral Suasion.” https://www.investopedia.com/terms/m/moralsuasion.asp
– Federal Reserve Board. Remarks by Chairman Alan Greenspan, December 5, 1996: “The Challenge of Central Banking in a Democratic Society.”
– The New York Times. “Searching for a Culprit in the Collapse of 2000.”
– Coibion, Olivier, et al. “Monetary Policy Communications and their Effects on Household Inflation Expectations.” Journal of Political Economy, vol. 130, no. 6, June 2022.
– De Pooter, Michiel. “Questions and Answers: The Information Content of the Post-FOMC Meeting Press Conference.” Economic Research: FEDS Notes, October 12, 2021.
– Federal Reserve History. “Near Failure of Long-Term Capital Management.”
– Congressional Research Service. “Systemic Risk And The Long-Term Capital Management Rescue.”
– European Central Bank. “Verbatim of the remarks made by Mario Draghi: Speech… at the Global Investment Conference in London, 26 July 2012.”
– Federal Reserve Bank of St. Louis (FRED). “Federal Funds Effective Rate.”
If the business’d like, I can:
– Summarize these points into a two-page memo for policymakers, or
– Create an investor checklist to evaluate whether a central bank’s public statements are likely to be effective.