New economics research suggests the Fed’s “less is more” approach to announcements may keep markets stable.

“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.”

FINDINGS:

• The research offers an economic rationale for why precise guidance from the Federal Reserve is not always more stabilizing for the economy.
• The team studied how Treasury markets moved over three decades of Federal Reserve announcements and 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, whether precision helps or hurts depends on the kind of uncertainty facing the economy.

Wake Forest Professor Aeimit Lakdawala is available to discuss the research findings and how they might inform the financial markets’ response to the Fed’s announcement about the future path of interest rates.

An overview of the research, “New economic research suggests less can be more in Federal Reserve announcements.”

For quick commentary/answers, email Professor Lakdawala at .