Fed funds and eurodollar futures prices indicate financial markets expect only one rate hike next year, leaving rates in a range of 2.50 percent to 2.75 percent by mid-2019, up from the Fed's current target of 1.75 percent to 2.00 percent.
Noting that the economy's "strong performance will continue" against a backdrop where there "does not seem to be elevated risk of overheating", Fed Chair Powell said that the "gradual process of normalization remains appropriate".
In June, the Fed predicted a total of four hikes this year, up from an earlier estimate of three.
Trump on Monday criticised the Fed for hiking rates too quickly, saying he was "not thrilled" with Powell, his own choice to lead the Fed. Fed officials have been forced to question the location of its "guiding stars" of economic policy, said Powell: the assumed levels for the natural rate of unemployment, neutral interest rate and stable inflation.
Even so, the policy has attracted the ire of President Donald Trump, who nominated Powell to the top Fed job and has since complained about his rate hikes.
It will be Powell's first chance to respond publicly to Trump's recent criticism, which critics say amounted to an intrusion on the Fed's longstanding independence from political influence.
The dollar weakened on Monday after Trump said he was "not thrilled" with Fed Chairman Jerome Powell's rate hikes and that the USA central bank should do more to help him to boost the economy. Still, central bankers have shown patience, raising rates at a careful pace while inflation has slowly moved higher.
The Fed "has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides", Powell said.
Powell's careful comments aren't likely to convince Trump, who insiders say is concerned that a rate-driven economic slowdown could hit right as he's gearing up for a 2020 re-election campaign.
Powell made no mention of Trump's criticism of the Fed's monetary policy. Real time estimates of the natural rate of unemployment were now too high, so a mechanistic approach to monetary policy would have recommended a much tighter stance in the 1990s.
The Fed has been slowly inching up its key interest rate because the US economy is doing better.
Based on the futures market, investors are nearly certain Fed policymakers will raise the benchmark interest rate to a range of 2 percent to 2.25 percent at its next meeting in late September, which would be the highest interest rates in a decade but not high by historical standards.
Asked at the time another bout of Trump critiques, Powell said "no one in the administration has said anything to me that really gives me concern on this front".
The single currency weakened on Thursday after Italian deputy prime minister Luigi Di Maio threatened his party would vote to suspend funding to the European Union next year unless other EU countries agreed to take in migrants.