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Asian shares fell sharply on Wednesday, while the dollar advanced after hawkish comments from Federal Reserve Chair Jerome Powell raised the possibility of the U.S. central bank returning to large rate hikes to tackle sticky inflation.

The Fed will likely need to raise interest rates more than expected in response to recent strong data, Powell said on the first day of his semi-annual, two-day monetary policy testimony before Congress.

The hawkish comments from Powell sent U.S. stocks sharply lower, with the risk-off mood continuing in Asian trade. [.N]

MSCI's broadest index of Asia-Pacific shares outside Japan was 1.45% lower, while Australia's S&P/ASX 200 index fell 0.70%. Japan's Nikkei rose 0.10%.

China shares fell 0.33%, while Hong Kong's Hang Seng Index slid 1.4%.

After a series of jumbo hikes last year, the Fed raised rates by 25 basis points in its last two meetings but resilient economic data since start of this year had stoked fears the U.S. central bank might return to larger rate rises.

Those fears were realized when Powell said: "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."

Markets are now pricing in an almost 70% chance of a 50 basis point rate hike at the Fed's March 21-22 policy meeting, according to CME's FedWatch tool, up from about a 30% a day ago.

"Powell has essentially opened the door to 50 basis point hike," said Chris Weston, head of research at Pepperstone.

"He has given the Fed optionality, but one suspects he would be loath to do so as it is not a good look to change tactics when you’ve only just moved down to 25 basis points increments."

Shorter-term Treasury yields continued its ascent on Wednesday, with the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, up 2.7 basis points at 5.038%, its highest since mid-2007.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -106 basis points, its deepest since August 1981, according to Refinitiv data. Such an inversion is seen as a reliable recession indicator.

"Given what we already knew, Powell's hawkish remarks shouldn't have been a surprise, but evidently the market was not prepared," said Rodrigo Catril, senior currency strategist at National Australia Bank.

"Recent data were already telling us that the U.S. economy started 2023 on a much stronger footing than most had anticipated with inflationary pressures also proving more persistence."

The spotlight will now be on Friday's U.S. payrolls data and next week's inflation figures that will dictate further moves from the Fed.

In the currency market, the dollar was at three month high, with the euro up 0.01% to $1.0548.

The Japanese yen weakened 0.15% to 137.33 per dollar, while sterling was last trading at $1.1834, up 0.06%.

U.S. crude fell 0.04% to $77.55 per barrel and Brent was at $83.34, up 0.06% on the day.