The Fed sees the USA economy's long-run growth at a 1.8 per cent annual rate - far below the Trump administration's projections for a sustained rate of 3 per cent. Initially, there was little reaction in the stock or bond markets.
"They are going to raise rates in September and probably going to give the signal that they going to raise rates in December", David Wessel of the Brookings Institution, told AFP.
Analysts at Rabobank International said, "We would like to add that with recent data indicating that domestic momentum remains strong - the Atlanta Fed's GDP nowcast for Q3 stood at 4.4 per cent on September 19 - it would take time for the trade war to slow U.S. economic growth down to a pace that would concern the FOMC".
The Fed will announce its interest rate decision at 2 p.m. Powell's news conference is scheduled for 2:30 p.m.
But the Fed sees the economy growing at a faster-than-expected 3.1% this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near the central bank's 2% target.
The U.S. central bank is now forecasting another rate hike in December, three more in 2019 and possibly even one more in 2020.
Stocks stayed in positive territory most of the day, but tumbled into the red in the final minutes following Powell's news conference, a sudden change in direction that is not unusual on the day of Fed decisions.
For comparison purposes, the Bank of Canada's benchmark interest rate sits at 1.5 per cent, but that is also widely expected to rise next month to 1.75 per cent.
The U.S. economy, as measured by the gross domestic product, is expected to grow 3 per cent for 2018 as a whole.
Megan Greene, global chief economist at Manulife Asset Management, said she thought the tariffs were more likely to slow the economy than to accelerate inflation. "Household spending and business fixed investment have grown strongly", the Fed said.
Powell said he had yet to see evidence that the administration's tariffs have raised prices for many consumers. But he said rising inflation remains a threat resulting from Trump's trade policies.
"It's a concern", Powell said. You don't see it yet. "The tariffs might provide a basis for companies to raise prices in a world where they've been very reluctant to and unable to raise prices". The big question is whether the strong US economy, which has been fueled this year by tax cuts and increased government spending, could weaken next year, especially if President Donald Trump's trade fights begin to inflict damage and the benefits of tax cuts start to fade.