Federal Reserve Chairman Jerome Powell signaled the central bank would consider quickening the wind down of its easy-money policies as it grapples with elevated inflation, which would open the door to raising interest rates in the first half of next year.

He said Tuesday the central bank would discuss accelerating the reduction of its asset purchases at its meeting in mid-December.

“The...

Federal Reserve Chairman Jerome Powell signaled the central bank would consider quickening the wind down of its easy-money policies as it grapples with elevated inflation, which would open the door to raising interest rates in the first half of next year.

He said Tuesday the central bank would discuss accelerating the reduction of its asset purchases at its meeting in mid-December.

“The risk of higher inflation has increased,” Mr. Powell said at a hearing Tuesday morning before the Senate Banking Committee. He appeared alongside Treasury Secretary Janet Yellen for the first of two days of hearings.

The Fed is heading into a difficult environment because the inflationary surge this year threatens to become more unpredictable due to the emergence of the new Omicron coronavirus variant.

The Fed closed a chapter on its aggressive pandemic policy response when it approved plans at its last meeting on Nov. 2-3 to shrink, or taper, its $120 billion monthly asset-purchase program by $15 billion in each of November and December. At that pace, the asset purchases would end next June. The Fed wants to end the asset purchases before it lifts interest rates, which it held near zero.

Mr. Powell said elevated inflation pressures and rapid improvements in the labor market would justify “wrapping up the taper, perhaps a few months sooner.” He joined a handful of Fed officials who said recently they would support deliberating at the Fed’s Dec. 14-15 meeting whether to accelerate the process of reducing those purchases.

If officials were to quicken the pace at which they reduce the purchases by $30 billion a month after the December meeting, they could conclude the program by March, giving them more flexibility to raise rates in the first half of next year.

“You’ve seen our policy adapt and you’ll see it continue to adapt” in response to concerns about more persistent inflation, Mr. Powell said.

Treasury Secretary Janet Yellen, foreground, and Federal Reserve Chairman Jerome Powell both appeared before the Senate Banking Committee on Tuesday.

Photo: jim lo scalzo/Shutterstock

Stocks tumbled and bond yields jumped after Mr. Powell’s comments Tuesday morning.

Mr. Powell backed away from the central bank’s initial characterization that elevated prices would be short-lived, or transitory. “It’s probably a good time to retire that word and explain more clearly what we mean,” he said.

Fed officials and private-sector forecasters had assessed that because the pandemic was likely to have a beginning, middle and end, so, too, would inflationary pressures associated with pandemic-related disruptions.

Mr. Powell said he still expects that because many price increases can be traced to supply-and-demand imbalances that resulted directly from the pandemic, inflation would decline next year. “But it’s also the case that pricing increases have spread much more broadly” in recent months, he said.

Mr. Powell pointed to rising energy prices, increasing rents and brisk wage gains as other factors that could keep inflation elevated. But the persistence of supply constraints remains hard to predict, and “it now appears that factors pushing inflation upward will linger well into next year,” he said.

The Fed chairman said the new coronavirus variant, identified in South Africa last week, risks intensifying supply-chain disruptions that have fueled a surprising surge in inflation this year while also potentially restraining the supply of labor.

Fed officials pledged to keep interest rates near zero until they are confident inflation will achieve their longer-run 2% goal after years of undershooting the mark and the labor market reaches conditions associated with maximum employment.

A slowdown in hiring and more persistent intervals of elevated inflation would bring the Fed’s goals into greater conflict, creating a difficult set of policy trade-offs, as officials consider when to raise interest rates from near zero. A new virus variant that keeps more Americans on the sidelines of the labor market for longer could put pressure on the Fed to conclude that wage and price pressures might grow more entrenched than initially anticipated.

Mr. Powell said it is unlikely that labor market conditions, particularly from the number of people seeking work, would return quickly to higher levels that preceded the pandemic. That means the Fed could conclude it needs to raise interest rates sooner than would otherwise be the case because it suggests a tighter labor market.

Persistent elevated inflation is “a major risk to getting back to such a labor market,” Mr. Powell said, offering his most pointed comments to date about the risks that high inflation pose to the Fed’s employment mandate.

Inflation has surged this year—to 5% in October from a year earlier, according to the Fed’s preferred gauge—amid strong demand for goods and services that have faced supply-chain bottlenecks associated with reopening the economy from the pandemic.

Federal Reserve Chairman Jerome Powell discussed in a Senate hearing the factors driving continued inflation and the risk the Omicron variant poses for the economy. Photo: Al Drago/Bloomberg News The Wall Street Journal Interactive Edition

The latest variant of the coronavirus, like the Delta variant that led to a slowdown in growth during the third quarter, raises the risks of more continuous economic disruptions that fuel higher inflation.

“Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions,” Mr. Powell said.

Meanwhile, Ms. Yellen again urged lawmakers to address the nation’s debt ceiling and said a failure to do so could threaten the U.S. economic recovery. The Treasury Department has been using what it calls extraordinary measures, such as suspending certain investments, to conserve cash as it bumps against the $28.88 trillion borrowing limit set by Congress.

Ms. Yellen said Tuesday that the federal government could run out of resources to fully meet its obligations as soon as Dec. 15 if the limit isn’t raised, reiterating previous projections.

“Right now, there’s uncertainty about where we will be on Dec. 15 and there are scenarios in which we can see it would not be possible to finance the government,” Ms Yellen said. “That doesn’t mean that there are not also scenarios in which we can, but we think it’s important for Congress to recognize that we might not be able to and therefore to raise the debt ceiling expeditiously.”

Some Republicans have been urging Democrats to address the debt limit using a special legislative process called reconciliation, which would require no GOP support.

“There’s only one reason that our Democratic colleagues refuse to use reconciliation to raise the debt limit and that is because they would have to specify the amount of debt they want to inflict on the American economy,” said Sen. Pat Toomey (R., Pa.), the ranking member on the Senate Banking Committee. “They want to avoid accountability for this terrible spending spree they’re engaged in.”

A vote to raise the debt limit doesn’t authorize new spending, but it essentially allows the Treasury to raise money to pay for expenses the government has already authorized. Democrats have said there should be bipartisan cooperation on addressing the limit, similar to what has been done under previous administrations led by both Republicans and Democrats.

Write to Nick Timiraos at nick.timiraos@wsj.com and Amara Omeokwe at amara.omeokwe@wsj.com