Fed's Precise Guidance May Not Always Be Best

New research from Wake Forest University suggests that the Federal Reserve's 'less is more' approach to announcements may be beneficial for keeping markets stable.

The study, which analyzed Treasury market movements over three decades of Fed announcements, found that when the Fed's guidance was more precise, markets reacted more strongly to news. However, whether precision helps or hurts depends on the type of uncertainty facing the economy.

According to Professor Aeimit Lakdawala, 'when we communicate very precisely, people build their expectations tightly around what we said, and they have stronger reactions when things turn out differently.'