Federal Reserve Chair Jerome Powell told lawmakers the central bank was “not far” from being able to cut interest rates and that rates were far above levels that might be anticipated during periods of mild inflation and moderate growth.

Powell repeated his view Thursday that the central bank was looking for greater confidence that inflation was returning to its 2% target, but he went one step further during his second day of testimony on Capitol Hill by qualifying how soon the Fed might get there.

“When we do get that confidence, and we’re not far from it, it will be appropriate to dial back” interest rates to avoid tipping the economy into a recession, he said.

Powell had signaled earlier that the Fed wasn’t considering a rate cut at its next meeting, March 19-20, which has shifted attention to whether the central bank might be in a position to cut rates around the middle of the year.

Powell also said he thought interest rates “now are well into restrictive territory.” Central banks sometimes judge their interest-rate stance against estimates of a so-called neutral rate that might be expected during times when supply and demand are at equilibrium in the economy.

Rates are “well above neutral,” he said. “We’re far from neutral now.”

The Fed raised interest rates over the last two years to what is now a 23-year high. Officials lifted their benchmark federal-funds rate most recently in July to a range between 5.25% and 5.5%. In projections released in December, most officials estimated that when inflation is at the Fed’s target and the economy is growing at its trend rate, a fed-funds rate between 2.5% and 3% would be appropriate.

But some officials have voiced doubts recently, given the strength of economic activity despite higher interest rates, over whether the neutral rate might be higher right now, diluting the impact of tighter policy.

“We thought we had two feet on the brakes, but maybe we have only one foot on the brakes,” said Neel Kashkari, president of the Minneapolis Fed, at The Wall Street Journal’s CFO Network Summit on Wednesday.

Write to Nick Timiraos at Nick.Timiraos@wsj.com