By Howard Schneider

Inflation in key parts of the U.S. service industry "remains elevated and has not shown signs of easing," the U.S. Federal Reserve said in its latest monetary policy report to Congress, an overview of where the economy stands issued ahead of Capitol Hill testimony next week by Fed chair Jerome Powell.

Hopes for the Fed to slow inflation, the report said, "may depend in part on a further easing of tight labor market conditions," meaning a likely rise in U.S. joblessness.

"Labor demand has eased in many sectors of the economy but

continues to exceed the supply of available workers, with job vacancies still elevated," the report said. Wages gains had slowed over the first part of the year, but "remain above the pace consistent with 2% inflation over the longer term."

The report noted that bank lending had "tightened notably" over the past year and would likely contract further following the failure of several regional banks in March.

But "despite concerns about profitability at some banks, the banking system remains sound and resilient," the report said.

(Reporting by Howard Schneider, Editing by Chizu Nomiyama)