The Federal Reserve will pursue gradual rate increases and keep an eye out for possible overheating in the U.S. economy as it tries to get inflation back up to its 2% goal, Chairman Jerome Powell said in prepared remarks for a congressional hearing.

Powell, in his first testimony in Congress as the Fed's leader, said "further gradual increases" in interest rates are necessary as the central bank looks to keep the economic expansion going.

But Powell will tell the House Financial Services Committee that the Fed will "continue to strike a balance between avoiding an overheated economy" and letting inflation return to its 2% goal, noting that the economy is getting some help from increased demand for U.S. exports, along with fiscal stimulus from Congress through tax cuts and a deal that boosts federal spending.

Powell, who took over as Fed chair this month, saw a sell-off in the stock markets in his first days in the role, as some investors feared inflation would strengthen substantially and force the Fed to hike rates quicker than expected.

Under Powell's predecessor, Janet Yellen, the Fed began to gradually raise the federal funds rate, which now stands at a target range of 1.25% to 1.5%. The central bank also began trimming a balance sheet that had swelled to about $4.5 trillion after the financial crisis.

The Fed's gradual tightening will continue, Powell said, noting he and Yellen have "worked to ensure a smooth leadership transition and provide for continuity in monetary policy."

He also downplayed the market volatility earlier this month. "At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation," he said. "Indeed, the economic outlook remains strong."

The economy, he said, grew at "a solid pace" over the past few months as the U.S. unemployment rate fell to 4.1%, the lowest since December 2000. Wages, he added, have "continued to grow moderately" but have likely been held down due to low productivity growth, though he said those figures may be rising because business investment "stepped up sharply" in 2017.

Still, inflation remains below the Fed's 2% target. The central bank's preferred gauge — personal consumption expenditures excluding food and energy — rose by 1.5% year over year in December 2017. Powell expressed confidence that inflation will return to the Fed's target "over the medium term," attributing the recent misses to temporary factors that "we do not expect will repeat."

"The committee views the near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely," he said.