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These are the three things markets are expecting to hear from the Fed and Jerome Powell

Key Points
  • The Federal Reserve's two-day meeting begins Tuesday, and it will end with a 2 p.m. ET statement Wednesday followed by a press briefing by Chairman Jerome Powell.
  • Powell is expected to tiptoe through his press briefing Wednesday and keep to measured speech, so as not to rock markets like he's done in the past.
  • Three things the markets want to hear include: 1. Balance sheet comments 2. "Patient" language 3. Data dependence 
Jerome Powell, Chairman of the Federal Reserve, speaking at the New York Economic Club on Nov. 28th, 2018.
Adam Jeffery | CNBC

The Federal Reserve is expected to leave interest rates unchanged at its meeting this week, and Federal Reserve chairman Jerome Powell is expected to go out of his way to not rock financial markets.

Powell has made some unfortunate missteps that have caused violent market reactions. Some Fed watchers expect he will tiptoe through his press briefing Wednesday afternoon, trying not to say anything that would change the Fed's message that it is patient and not in a rush to raise rates.

The Fed's two-day meeting begins Tuesday, and it will end with a 2 p.m. ET statement Wednesday followed by a press briefing by Powell.

"I'm betting this is a press conference he'd rather not have. It's all risk, no return," said Ethan Harris, head of global economics at Bank of America Merrill Lynch. "They've calmed the markets."

Harris said Powell and other Fed officials have successfully pushed back against criticism that they were ignoring the warning from the markets about economic weakness. "They made it clear they do pay attention to the markets and business leaders, and they're not just fixated on hard data," said Harris.

At the briefing after the December meeting, Powell described the Fed's program to wind down its balance sheet as being on "autopilot." That comment unnerved investors, and Powell took pains to explain several weeks later that the program was set up to run int the background as the Fed used its rate policy as its foremost tool.

'Prudence, patience and good judgement'

But Powell also said the balance sheet would be "substantially smaller" than it is now when the Fed is done. Since then, news reports indicate the Fed could be in the process of considering ending its program sooner than it had expected. The Fed reduces the balance sheet by no longer replacing a portion of the Treasury securities and mortgages, as they mature.

Powell had another run in with markets when he said in early October that the Fed was far from a neutral rate, a comment that triggered a swift run up in interest rates and a decline in stocks. He also had to back down from that comment, which suggested the Fed had to raise interest rates much more in the current cycle.

Fed officials have spent weeks wooing markets, making it clear they will be watching economic reports and go slow when it comes to raising rates.

New York Fed President John Williams was one of those and in mid-January, he explained that the Fed has now transitioned from a period in 2018 when the economy was growing above trend and gradually raising interest rates was necessary. "Twelve months later, the tailwinds have lost their gust, interest rates are closer to normal levels, and inflation is tame. The approach we need is one of prudence, patience and good judgment. The motto of 'data dependence' is more relevant than ever," he said.

So now, Powell and the Fed's statement are expected to echo those and other comments.

"I think that the Fed has pretty much finished the pivot. They went form being hawkish sounding and focusing on baseline forecasts to admitting they're uncertain about the outlook and now being very flexible about the policy moves," Harris said.

Three things the markets want

Here are three comments investors expect to hear Wednesday afternoon.

1. Balance sheet. The Fed's balance sheet is now in play, following news reports that the program is under discussion by Fed officials and not on 'autopilot' forever.

"It clearly is one of the main things under discussion," said Luke Tilley, chief economist at Wilmington Trust. "I think it will be a fairly uneventful meeting in terms of the information we get, as the public." But Tilley expects the Fed will be debating what level it wants the balance sheet to be and Fed staff is probably set to deliver a presentation on it.

As for Powell, Fed watchers expect him to sound flexible on the balance sheet policy and note that its under review.

2.  "Patience and flexibility ". Powell introduced that the Fed could have "patience" when he sat on a panel with former Fed chairs Ben Bernanke and Janet Yellen in early January. That was a soothing phrase and one the markets expect to hear again.

"I think they need to add some language about patience and needing to be patient. That's what the markets want right now," Harris said.

3. Listening to data and markets. Data dependence takes on a new meaning. Fed officials are expected to continue to emphasize that they will base rate decisions on incoming data, instead of hiking on a pre-set schedule. But Fed watchers expect them to also emphasize that they will pay attention to the type of message they can get from markets and business leaders on the economy.

Further, Powell will likely be asked to discuss what the Fed has done while it went without weeks of government data that was unavailable, due to the government shutdown.

"A good baseline expectation for the press conference will be Powell reemphasizing patience and prudence and evaluation of the data as it comes in. There is definitely expectations for the Fed to be dovish," said Ben Jeffrey, strategist at BMO.