Updated at 5:38 p.m. ET

The Federal Reserve remains on track to continue increasing interest rates gradually to keep the economy functioning smoothly, Jerome Powell told Congress on Tuesday in his first testimony as Fed chairman.

With a nod to the new tax-cutting law, Powell noted that "fiscal policy is becoming more stimulative" and he predicted inflation would rise this year and stabilize around the Fed's 2 percent target.

"My personal outlook for the economy has strengthened since December," Powell told the House Financial Services Committee.

Powell is providing the semi-annual report to Congress on the state of the economy and the Fed's monetary policy. He is scheduled to testify on the same topic before the Senate Banking Committee on Thursday.

Powell replaced Janet Yellen as Fed chairman about three weeks ago and was immediately tested by turmoil in the stock market. Major indexes fell more than 10 percent but have since recovered much of that ground. Members of Congress will be interested in his views on market volatility and how the Fed will respond to it.

Investors saw something to worry about in Powell's comments about rising inflation: They thought it made it more likely the Fed would increase rates faster. The Fed has signaled three quarter-point rate hikes for 2018 — the first likely to come at the next Fed meeting in March.

Futures markets showed the odds of a fourth rate hike rising in response to Powell's comments. Stocks, which benefit from low rates, fell sharply Tuesday, while interest rates rose in the bond market.

Though he said his personal outlook for the economy has strengthened in recent months, Powell declined to speculate on the views of other Fed officials. Fed policymakers will release a new set of projections in March. "I wouldn't want to prejudge that new set of projections," Powell said.

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