"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell told the Senate Banking Committee.
The US central bank has already raised its benchmark lending rate eight times since early last year, as it contends with inflation that remains stubbornly above its long-term target of 2 percent.
The Fed raised rates last month by a quarter percentage point to between 4.5 and 4.75 percent, its highest level since the global financial crisis.
US stocks fell following Powell's remarks, with the S&P 500 index down around one percent just after midday local time.
Stocks spent much of February in the red as Treasury yields climbed amid worries of more aggressive Fed actions to counter inflation.
The dollar strengthened sharply against the euro and other major currencies following Powell's comments.
- Chance of a bigger hike -
Powell's comments raise the likelihood of the Fed raising rates by 50 percentage points at its next meeting on March 21-22, Evercore ISI economists Krishna Guha and Peter Williams wrote in a note to investors.
"We must accept that this option appears to be somewhat more live than we had previously believed," they said, while suggesting a quarter percentage point hike was still the more likely option.
Markets are now roughly evenly split on the chances of a larger half percentage point hike, according to Joe Manimbo, senior market analyst at Convera.
Despite its forceful moves, the Fed's favored inflation measure, personal consumption expenditure, rose slightly to reach an annual rate of 5.4 percent in January.
Core PCE inflation, which excludes volatile energy and food prices, also rose to an annual 4.7 percent.
At the same time, the labor market remains "extremely tight," with close to two jobs available for every one unemployed person in December, Powell said.
US job creation surged in January, with employers creating more half a million new jobs and driving the unemployment rate to its lowest level since the 1960s.
A strong labor market supports incomes and, in turn, demand.
While wage growth has slowed somewhat, analysts believe this is not yet enough for the Fed.
Policymakers have been concerned that elevated wages could feed into inflation, complicating the battle to rein in prices.
"To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions," Powell said.