"We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession," she said. "Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential."
With speculation increasing that the Fed could taper its asset purchases as soon as next month, Yellen also suggested the central bank still needed to support the economy.
(Read more: What to watch for in the Yellen hearing: El-Erian)
"A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy," she said.
The dollar weakened versus both the euro and yen after Yellen's comments. Stock futures rose slightly, while yields on U.S. 10-year bonds fell to a day's low of 2.72 percent.
(Read more: Janet Yellen's mission impossible)
—Reuters contributed to this report.