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Why Bernanke's 'open mouth' operations beat policy moves

The Federal Reserve chairman is driving markets with 'open mouth' operations, which are just as effective as 'open market' operations, former Fed governor Randall Kroszner told CNBC.

Comments from Fed chief Ben Bernanke have sparked wild swings in financial markets over the past two months, with investors scrutinizing Bernanke's words closely to work out the possible timing of an unwinding of the central bank's $85 billion-a-month asset-purchase program.

(Read More: Market's 'overreacted' to taper, ex-Fed chief says)

"The open mouth operations are just as effective as the open market operations," said Kroszner, referring to central bank buying or selling of government bonds.

"Look what happened [after the June Fed meeting]. The chairman opened his mouth and didn't make any change to the open market operations or [asset] purchases and said we might do something, and the markets went wild," added Kroszner, who is professor of economics at the University of the Chicago Booth School of Business and served as a Fed governor and a voting member of the Federal Open Market Committee between March 2006 and January 2009.

Comments from Bernanke in May and June suggested that Fed monetary stimulus could be unwound this year dealt a blow to risk assets and sent government bond yields higher.

(Read More: Has Bernanke perfected balance between hawks and doves?)

But last week, Bernanke eased market jitters, using a semi-annual testimony to Congress to reiterate that U.S. monetary policy was likely to remain "highly accommodative" for the foreseeable future.

Those comments have helped contain a rise in Treasury yields, which analysts say is important to keeping the economic recovery on track since Treasurys affect the interest rates on fixed-rate mortgages.

Federal Reserve Board Chairman Ben Bernanke holds a press conference on the Fed's policies on June 19, 2013
Source: Federal Reserve
Federal Reserve Board Chairman Ben Bernanke holds a press conference on the Fed's policies on June 19, 2013

September Taper?

According to Kroszner, the Fed could start taking back its monetary stimulus in September if the August and September employment data show the economy created 175,000 to 200,000 new jobs a month.

Bernanke has stressed that any tapering plans would be dependent on the strength of U.S. economic data. Most market watchers expect the Fed to start tapering in September.

(Read More: Fed may not taper, but at least they won't hike soon either)

But Kroszner added that the Fed's plans to scale back its monetary stimulus could be delayed by renewed focus on the debt ceiling, the legal limit for debt issuance.

In May, U.S. Treasurer Jack Lew told CNBC the debt ceiling would be reached in September, which means the debate on whether to raise the debt ceiling is likely to take center stage again.

(Read More: Jack Lew: Debt ceiling won't be reached until Labor Day)

"There is also the issue of the debt ceiling debate and they [Fed policymakers] might want to see what happens with that, as we have some less than adult fiscal debates in Washington," said Kroszner.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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