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Fed Chair Powell says US inflation not at 'cusp of acceleration'

Federal Reserve Chairman Jerome Powell, at his first news conference, struck an optimistic tone about U.S. economic growth and did not sound worried that inflation would suddenly jump higher.

While inflation appears to be rising toward the central bank's 2% target, the data do not suggest that "we're in the cusp of an acceleration of inflation," Powell said after the Federal Open Market Committee raised interest rates for the first time in 2018 and upgraded its projections for GDP growth this year.

The FOMC voted unanimously to raise the benchmark federal funds rate by 25 basis points, which Powell described as "another step in the ongoing process" of gradually bringing stimulative monetary policy back to normal levels.

Some analysts had also anticipated that Fed officials would signal that they are now penciling in four rate hikes in 2018, as the Fed sees firmer inflation figures and higher economic growth driven partly by tax cuts. Instead, the median FOMC participants' projection still showed three planned rate hikes in 2018.

Powell, though, emphasized that those are just forecasts and that the Fed only "made one decision" at this meeting. "It could change up. It could change down," Powell said of the 2018 projection. "For now, these are the best forecasts that people could make."

Still, some analysts said the Fed is clearly eyeing three more rate hikes this year. The so-called "dot plot" of Fed officials' rate projections showed that six of them view four rate hikes in 2018 as likely appropriate, up from three in December 2017. Plus, analysts said, the two participants who came in on the lower end of the range likely are not voting members of the FOMC this year.

The two dissenters on last year's rate hikes, Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari, rotated out of their FOMC voting spots this year.

"While the Fed didn't signal a fourth rate hike this year, that change is coming," said Ryan Sweet of Moody's Analytics in a research note. "In fact, we would argue that it's already baked into the Fed's plans."

The projections also showed that Fed officials now expect GDP to grow by 2.7% in 2018, up from the 2.5% they had expected as of December 2017. Still, some FOMC participants have heard concerns from business leaders that U.S. tariffs on steel and aluminum, along with any retaliation from other countries, could dampen growth going forward, Powell said. The discussions around tariffs have not yet changed the Fed's forecasts, he added.

"The job market remains strong, the economy continues to expand and inflation appears to be moving toward the FOMC's 2% longer-running goal," Powell said.

Inflation has largely been below that target in recent years, with the Fed's preferred inflation gauge stuck at 1.5% in the past three monthly readings. Powell attributed those misses "at least partly" to temporary factors that should be stripped out of the readings in coming months.

But he also suggested that the misses could be due to a labor market that has not fully tightened, even as the U.S. unemployment rate hit a 17-year low of 4.1%. Powell said he has been surprised that the low jobless rate has not led to significant wage gains, though he said that may change as labor markets tighten further.

The median FOMC participants' projection of the unemployment rate is 3.8% at the end of this year and then dropping to 3.6% by the end of 2019.

"I think we will know that the labor market is getting tight when we do see a more meaningful upward move in wages," he said.

The stock market slipped a bit to end the day as traders digested Powell's comments, with the Dow Jones Industrial Average falling 0.18% to 24,682.31, the S&P 500 losing 0.18% to 2,711.93 and the Nasdaq Composite Index dropping 0.26% to 7,345.28.

Chris Low, chief economist at FTN Financial, said the news conference was "largely uneventful," with Powell echoing comments from his predecessor Janet Yellen.

"Powell was calm, confident and comfortable," he said in a note to clients. "His answers were safe, offering little guidance on the committee's thinking beyond what was already revealed in the [projections]."

Powell also said he is "carefully considering" whether he should hold more news conferences than his predecessors, who began doing a quarterly news conference in 2011. Some have speculated that Powell, who has emphasized the need for transparency at the Fed, may decide to speak to reporters after each FOMC meeting, rather than after every other one.

Markets, though, currently expect that the Fed is more likely to move rates at meetings with press conferences and could interpret scheduling more news conferences as an indication that the Fed wants to take quicker action.

"I would want to think very carefully about it and make sure that no one would take more frequent press conferences as a signal of the path of policy," he said.