While Mr Powell gave his strongest indication yet that the Fed is considering smaller interest rate increases, he said the fight against inflation is “far from over”.
“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he said at the Brookings Institution think tank in Washington.
“The time for moderating the pace of rate increases may come as soon as the December meeting.”
The S&P 500 rose 0.63 per cent as of 1.50pm ET as Mr Powell delivered his remarks. The Nasdaq Composite was up 1.31 per cent and the Dow Jones Industrial Average rose 0.15 per cent.
Traders expect the Fed to raise interest rates by 50 basis points following its December 13-14 meetings. The Fed has raised interest rates by 75 basis points over four consecutive meetings to rein in runaway prices.
The central bank has raised interest rates between 375 and 400 basis points since March, when it was nearly zero.
In what is the biggest inflation battle the US has faced since the 1980s, Mr Powell has maintained optimism that the Fed can achieve a “soft landing” by increasing interest rates without dragging the economy into a recession.
He said slowing the rate rises could be helpful in reducing the risk of the Fed overtightening its policy.
“We think that slowing down at this point is a good way to balance the risks,” he said.
Mr Powell said the Fed is forecasting 12-month inflation on the personal consumption expenditures price index.
PCE inflation was at 6 per cent through October and a 5 per cent core rate that does not include volatile food or energy inflation.
But there is not enough evidence to suggest that inflation will slow in the near future.
“Forecasts have been predicting just such a decline for more than a year while inflation has moved stubbornly sideways,” he said.
“The truth is that the path ahead for inflation remains highly uncertain.”
Mr Powell then went through the conditions needed for inflation to climb back down to the Fed's 2 per cent goal.
Growth in the economy has slowed and must continue to slow, supply chain bottlenecks appear to be easing and housing services inflation is expected to fall sometime in 2023.
Still, the labour market is showing only “tentative signs of returning to balance” and wage growth is still too high. There are currently 1.7 jobs for every one person.
“This is a great labour market, in that sense — too great in a way because it's going to be heading to inflation,” he said.
And while “strong wage growth is a good thing”, Mr Powell said it must be consistent with 2 per cent inflation to be sustainable.
Fed officials will next monitor Friday's unemployment report. A Bloomberg survey of economists forecasts a jobs gain of 200,000 for November, its slowest in roughly two years.