On the widely expected rise in interest rates in December, Yellen said that putting off an interest rate increase much further could cause a "relatively abrupt" rise further down the line. The US dollar gained against the euro as her testimony was released and further questioning continued.
She cautioned against further delay in the interest rate rise, saying that "holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability."
Low interest rates make borrowing cheaper, which increases investor risk appetite.
Yellen was strident in her defence of the Dodd-Frank Act. The Act was passed by the Barack Obama administration to improve systemic stability in the aftermath of the financial crisis.
She said that after "a devastating financial crisis" reform was needed. "Many of the appropriate reforms are embodied by Dodd-Frank," she said, pointing to more stringent requirements on capital holding, liquidity and margin requirements.
"I would not want to see all the improvement that we’ve put in place, I wouldn't want to see the clock turned back on that," she said.
Balanced outlook for Trump's economy
While Yellen's prepared statement did not explicitly mention the new President-elect, she outlined a firm commitment to stay in her post until 2018. She said: "I was confirmed by the Senate for a four-year term... it is fully my intention to serve out that term".
During the election campaign she was heavily criticised by President-elect Donald Trump which had led to speculation that she might leave the position early. The testimony was her first public statement since the election.
On the US economy, Yellen said that she expected prospects to improve, and for inflation to rise to the target rate of two per cent over the coming years. Yellen said that "near-term risks to the outlook were roughly balanced".
"I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labour market conditions and a return of inflation to the Committee's two per cent objective over the next couple of years," she said.
Measured approach to rate rises
Yellen laid the foundation for an incremental approach to any rise in interest rates to avoid having to make larger adjustments later. She said:
Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals.
This will be seen as confirmation of market predictions of a rate rise when the Federal Reserve's Open Markets Committee meets to set the federal funds rate, the rate at which it lends money to banks. It meets on 13-14 December.
Most analysts expect further rises over the course of 2017 as the Fed moves away from historically low rates.
Yellen also said that she sees potential for the US jobs market to improve. She said:
Waiting for further evidence does not reflect a lack of confidence in the economy. Rather, with the unemployment rate remaining steady this year despite above-trend job gains, and with inflation continuing to run below its target, the Committee judged that there was somewhat more room for the labour market to improve on a sustainable basis than the Committee had anticipated at the beginning of the year.