UPDATE 1-Fed chief Powell says no evidence U.S. economy overheating

(Recasts with comments from hearing)

WASHINGTON, March 1 (Reuters) - Federal Reserve Chairman Jerome Powell said on Thursday there was no evidence the U.S. economy is overheating, and labor markets may still have room to improve as the central bank sticks with a gradual pace of interest rate increases.

"There is no evidence the economy is overheating," Powell told the Senate Banking Committee in his second appearance in Congress this week.

Though the current 4.1 percent unemployment rate was "at or near or even below" estimates of the full employment rate, "we don't see any evidence of a decisive move up in wages ... Nothing in that suggests to me that wage inflation is at a point of acceleration," Powell testified.

Powell said risks are "more two-sided" now than early in the recovery from the financial crisis, adding that "the thing we don't want to have happen is to get behind the curve."

But he said at this point the Fed could continue "to gradually raise interest rates ... That is the path we have been on and my expectation is that will continue to be the appropriate path."

Since Powell's appearance before the House of Representatives Financial Services Committee on Tuesday, markets have been looking for clarity over whether the Fed will accelerate the pace of its rate increases this year.

His comments on Tuesday sparked a jump in U.S. bond yields and a drop in U.S. stocks as investors took his bullish statements about the economy as a signal the Fed would raise rates four times this year, as opposed to the three increases policymakers projected in December.

Equities fell again on Wednesday and were slightly lower in late morning trading on Thursday. Earlier, the Commerce Department reported that consumer prices increased in January, with a gauge of underlying inflation posting its largest gain in 12 months.

The report added to the sense that inflation is moving up to the Fed's 2 percent target.

"Rising inflationary pressures will keep the Fed hiking," analysts at Capitol Economics wrote after the latest inflation data. (Reporting by Howard Schneider Editing by Paul Simao)