By Ann Saphir

(Reuters) – Federal Reserve Chair Jerome Powell has a tough task on Wednesday as he wraps up the U.S. central bank’s first policy meeting of 2024: signaling an end to interest-rate hikes and teeing up future cuts without unleashing financial market exuberance that might undermine progress on inflation.

On one level the job is straightforward. Though the Fed has left its benchmark rate at between 5.25% and 5.5% since July and is expected to keep it there on Wednesday, its policy statement has continued to include a reference to “additional policy firming” as a reminder that any future adjustments would be upward.

Many analysts expect the Fed to delete that phrase this time around. Powell laid the groundwork for the change last month, when he said policymakers think another rate hike is unlikely to be needed.

“It’s become dated,” said Oxford Economics’ Ryan Sweet, citing quickly cooling inflation.

Dropping it would give room to cut rates as soon as March if price pressures or economic growth ease faster than expected, said High Frequency Economics’ Rubeela Farooqi – though she, like many economists, believe rate cuts won’t start until June.

But analysts disagree on what the Fed will say instead, in part because there is such wide agreement that removing the phrase will be seen not just as opening the door to a rate cut, but practically walking through it. A resulting rally in markets might ease financial conditions and encourage spending and investment that might potentially reignite waning price pressures.

To forestall that possibility, Fed policymakers may opt to characterize current policy as “sufficiently restrictive” or add a word like “patient” or “cautious” to signal a longer hold at the current policy-rate level, analysts said.

Several economists expect the Fed simply to swap in a more neutral phrase for coming moves, such as “in determining appropriate policy” or “any future adjustments,” and rely on Powell, in his post-meeting press conference, to clarify what that means.

But change is fraught.

“The risk is for markets to run with a generic ‘adjustments’ line as a signal that March is very much on the table,” wrote economists at BNP Paribas (OTC:), whose view is that while it’s a close call they think the “firming” phrase will stay, given recent Fed official commentary.

Removing it, even with the addition of a promise of patience, “would heighten focus on the press conference, potentially complicating Powell’s task,” they wrote.

CURBING ENTHUSIASM

Powell is known for his plainspoken explanations of complicated economic dynamics and an unruffled demeanor in the face of sharp political criticism.

Dealers on Wall Street assess communications under his watch as being more effective than under either of his two most recent predecessors.

But he’s had his share of miscues and miscalculations.

In October 2018 he signaled more rate hikes ahead despite what investors perceived as a swiftly weakening outlook. Then in 2021 he stuck with calling inflation “transitory” despite accumulating data that it was gaining more lasting traction.

Toward the end of that year he retired “transitory” and moved to slow the Fed’s bond purchases to prepare for eventual rate hikes, but critics blame the subsequent climb in inflation to 40-year highs in part on the Fed not starting its rate-hike campaign until March 2022.

The picture is now dramatically different. By some measures inflation has been at the Fed’s 2% target for months now, though by the yardstick the Fed targets, the annual change in the personal consumption expenditures price index, it is still above target at 2.6%.

But complicating matters is the strong consumer spending that helped the economy grow 3.1% last year, measured on a fourth quarter to fourth quarter basis, versus the 2.6% Fed officials penciled in at their last public projections, published mid-December.

That’s despite the Fed’s aggressive interest rate hikes that, at the start of 2023, most economists and the Fed’s own staff thought would trigger a recession.

“The consumer has been downright defiant,” says KPMG’s Diane Swonk, and that will keep officials from projecting too much confidence in the timing of rate cuts. “Powell will be cautious to curb his enthusiasm at the press conference so that he does not inadvertently trigger a major financial market rally,” she said.

Last month Fed policymakers signaled they saw 75 basis-points of rate cuts this year as likely appropriate; Swonk says that by March, they may up that forecast to a full percentage point, and start delivering reductions in May.

“The Fed is trying to normalize rates for a robust economy, not overstimulate,” she said. “That is a tough line to walk.”