Patience. A focus on incoming economic data. And no interest rate hikes likely soon.
The message the Federal Reserve is poised to send when its latest policy meeting ends this week is a soothing one. It reflects an abrupt shift in tone since the start of the year in the face of a slowdown in the United States and abroad, persistently tame inflation and a nervous stock market. The shift toward a more hands-off Fed has pleased investors and encouraged the view that the central bank is done raising rates for now and might even act this year to support rather than restrain the economy.
In a statement Wednesday, in updated economic forecasts and in a news conference by Chairman Jerome Powell, the Fed will likely note that while the economy is on firm footing, it faces risks from slowing growth and trade conflicts. Against that backdrop, the thinking goes, it would be unwise to keep raising rates, as the Fed did four times in 2018.
The Fed is instead set this week to keep its key short-term rate in a range of 2.25 percent to 2.5 percent. And most analysts think the policymakers will scale back their projection of rate hikes this year from two to one or perhaps even none.
There is also anticipation that the Fed will specify when this year it expects to stop shrinking its huge portfolio of bonds, part of its balance sheet. Doing so would help keep a lid on loan rates.
All of which suggests that the Fed may recognize that it went too far after it met in December. After that meeting, the policymakers forecast two additional rate increases in 2019, and Powell said he thought the balance sheet reduction would be on "automatic pilot." That observation, in particular, seemed to spook investors with the prospect of steadily higher borrowing rates for consumers and businesses and perhaps a further economic slowdown. Stock prices tumbled for days afterward.
President Donald Trump, injecting himself not for the first time into the Fed's ostensibly independent deliberations, made clear he wasn't happy, calling the December rate hike wrong-headed. Reports emerged that Trump was even contemplating trying to fire Powell, who had been his hand-picked choice to lead the Fed.
But after the December turmoil, the Fed in January began sending a more comforting message. At an economic conference soon after New Year's, Powell stressed that the Fed would be "flexible" and "patient" in raising rates—a word he and other policymakers have invoked repeatedly since — and "wouldn't hesitate" to change course if necessary.
In the subsequent weeks, the Fed has gone still further, with Powell signaling that the central bank is close to announcing a plan to end its bond reduction program. This has helped cheer investors because it would likely mean that bond rates would remain contained and some investors would shift money into stocks.
Powell, appearing last week on CBS's "60 Minutes," denied that pressure from Trump had influenced the Fed's policy shift. Private economists generally agree that a slowing economy and a sinking stock market, which eased Fed worries about any possible stock bubble, were more decisive factors.
"Conditions changed dramatically in December with the stock market collapsing and global growth slowing " said David Jones, an economist and author of several books on the Fed. "Everything came together, and 'patient' became the Fed's new watchword."
Because the change in Fed policy happened so fast, some analysts say the chairman may use his news conference Wednesday to explain the changed outlook.
"I believe Powell will want to provide a justification of why the Fed has done a 180-degree turn in the last few months," said Sung Won Sohn, chief economist at SS Economics.
Economists also expect the Fed's updated forecasts to downgrade its estimate of growth in light of a slowdown in manufacturing and retail, sluggish housing and construction activity and global pressures, including an ongoing trade war. Still, some analysts say, the Fed will want to avoid escalating public concerns about the health of the economic expansion, the second-longest on record.
"They don't want to be too alarming," said Diane Swonk, chief economist at Grant Thornton. "Much of this weakness is likely to be transitory."
After sharply falling in December, stocks have rallied and recouped most of their late-year losses in trading since the start of 2019, a rebound credited larger to the Fed's easier monetary stance. Some analysts say they think the Fed won't raise rates at all this year if the outlook becomes as dim as they are forecasting.
The economy, as measured by the gross domestic product, grew 2.9 percent last year, the fastest pace since 2015. The budget plan the Trump administration proposed last week forecasts that growth will reach 3.2 percent this year and stay around 3 percent for the next decade.
That is far more optimistic than outside economists foresee. Most of them expect growth to weaken to just above 2 percent this year. For the Fed, the key question is whether the slowdown represents a soft landing for the economy, with inflation contained and growth modest but steady, or something more alarming.
Swonk and most other economists have said the economy is likely to avoid a recession this year.
"I think we will be able to achieve 2.3 percent growth," she said. "It's a big slowdown from 2018, but it is still fast enough that the unemployment rate will go down further and we will get broader wage gains."