The Watchful Peace is a relatively peaceful period during the Third Age.
The Watchful Peace began in Third Age 2063, when Gandalf went to Dol Guldur and the evil dwelling there (later known to be Sauron) fled east. It lasted until 2460, when Sauron returned with new strength.
This took place shortly after the loss of Eärnur, the last king of Gondor, and so the first ten Ruling Stewards had relative calm in which to renew their strength. During the Watchful Peace Gondor strengthened its borders, keeping a watchful eye on the east, as Minas Morgul was still a threat on their flank and Mordor was still occupied with Orcs. But no major escalations occurred except for minor skirmishes with the Haven of Umbar. Stewards of Gondor during the Watchful Peace included Mardil Voronwë, Eradan, Herion, Belegorn, Húrin I, Túrin I, Hador, Barahir, Dior, and Denethor I.
In the north, Arthedain and Arnor were long gone, but Angmar had also fallen. The first seven Chieftains of the Dúnedain reigned during the Watchful Peace: Aranarth, Arahael, Aranuir, Aravir, Aragorn I, Araglas, and Arahad I. The Hobbits of the Shire prospered and even expanded; Buckland was first occupied by Oldbucks at this time. Isumbras I became the first Tookish Thain of the Shire in 2340.
The Dwarves of Durin's folk under Thorin I abandoned Lonely Mountain, and left for the Grey Mountains, where most of their kin now gathered. The Éothéod dwelt in the north vales of Anduin during the Watchful Peace.