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. Core PCE inflation, which excludes volatile energy and food prices, also rose 4.7 percent. Despite its forceful moves, the Fed's favored inflation measure, the personal consumption expenditures (PCE) price index, rose slightly to reach an annual rate of 5.4 percent in January. Markets are now roughly evenly split on the chances of a larger half-point rate hike, said Joe Manimbo, senior market analyst at Convera. 'We must accept that this option appears to be somewhat more live than we had previously believed,' they said, though adding that a quarter-point hike was still the more likely option. Powell's comments raise the likelihood of the Fed lifting rates by 50 basis points at its next meeting this month, Evercore ISI economists Krishna Guha and Peter Williams wrote in a note to investors. It raised rates last month by a quarter percentage point to 4.50-4.75 percent, its highest level since the global financial crisis. 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 two percent. The dollar strengthened sharply against the euro and other major currencies, while the two-year US Treasury yield surged above five percent. Stocks fell sharply following Powell's comments, with the Dow Jones Industrial Average closing 1.7 percent lower.

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