New research offers an economic rationale for why precise guidance from the Federal Reserve is not always more stabilizing for the economy.
By studying how Treasury markets moved over three decades of Federal Reserve announcements, the team found that when the Fed’s guidance was more precise, markets reacted more strongly to news. The clearer the signal, the bigger the reaction.
However, the lesson isn’t “always say less.” Whether precision helps or hurts depends on the kind of uncertainty facing the economy.
With Federal Reserve communications, it seems intuitive that clearer, more precise information is always better—especially when dealing with money. But Wake Forest University economists Aeimit Lakdawala and Jinyoung Seo, together with Myungkyu Shim of Yonsei University, show that this is not always the case.
Associate Professor of Economics
The team’s new working paper, “On the Optimal Precision of Central Bank Communication,” provides an economic rationale for why more precise guidance from the Federal Reserve is not always more stabilizing. Whether it helps or hurts, the authors find, depends on the kind of uncertainty facing the economy.
When more detail can backfire
The starting point is a simple observation. When the Federal Reserve is very precise about where interest rates are headed, markets listen harder and react more sharply to each new piece of news. Those larger market swings can ripple out into the broader economy.
Lakdawala offers an everyday analogy.
“If I tell you I’ll pick you up for lunch around noon and I show up at 12:10, there’s no problem,” Lakdawala explains. “But if I tell you I’ll be there at 12:02 and I show up at 12:10, you’re likely to be anxious. When we communicate very precisely, people build their expectations tightly around what we said, and they have stronger reactions when things turn out differently.”
In the same way, the more precisely the Fed maps out the path of interest rates, the more heavily markets lean on that guidance, and the larger their reaction when the outlook shifts.
That reaction does not stay confined to Wall Street. In the authors’ model, swings in long-term bond prices change the wealth of the households that hold them. Many households, including retirees, hold long-term bonds (directly or through pensions and funds), so when bond prices move sharply, so does their wealth, and that can affect how much they spend. This is how volatility in financial markets finds a path into the real economy, says Lakdawala.
“Advocating for less precision is not an argument for keeping the public in the dark.”
Wake Forest University Associate Professor of Economics Aeimit Lakdawala
“The Fed can be clear about its goals without spelling out the future path of interest rates in a way that causes unnecessarily large market swings,” says Lakdawala.
When clarity helps
Precise guidance also has a real benefit: It helps markets tell the difference between a temporary movement in rates and a lasting shift in the Fed’s policy stance. Without it, people can mistake a one-off change for the start of a new direction.
So the lesson isn’t “always say less.” It depends on what people are actually trying to figure out, Lakdawala says. “Sometimes the question is a small one: was that rate move a one-off, or the start of a trend? Clear guidance settles it. Other times, the question is bigger: where is the Fed taking rates over the next few years? A precise answer there can backfire, as markets pounce on every word and the swings that follow reach ordinary households.”
The Federal Reserve itself has moved back and forth along this spectrum. At times, it has used specific, calendar-based language, promising, for example, in 2011, that rates would stay low “at least through mid-2013.” At other times, it has favored more open-ended language, saying that policy would be “data dependent.” The research offers a way to think about when each approach is appropriate.
The evidence: Markets really do react more
By studying how Treasury markets moved over three decades of Federal Reserve announcements, from 1994 through 2025, the researchers found that when the Fed’s guidance was more precise, markets reacted more strongly to news about where rates were headed. The clearer the signal, the bigger the reaction.
“The practical lesson is not that the Fed should always say less,” Lakdawala said. “Sometimes precision helps markets understand whether a rate change is temporary. At other times, very precise guidance can magnify the response to news with lasting implications. Good communication requires judging which kind of uncertainty matters most.”
Professor Lakdawala is available for interviews to discuss the research, its implications for Federal Reserve communication, and how financial markets respond to news about the future path of interest rates. Contact to arrange an interview.
