Yellen contended that the central bank would need to tighten policy in a "timely fashion," adding that delaying could lead to abrupt moves. She reiterated the Fed's stance that the timing of the first hike matters less than making subsequent moves gradually.
"The more prudent strategy is to begin tightening in a timely fashion and at a gradual pace," Yellen said.
Her speech came a week after the Fed's policy-making committee voted to keep its short-term interest rate target near zero. Market watchers have scrutinized Yellen's words as they look for clues as to whether the U.S. central bank will hike rates after either of this year's remaining policy meetings in October and December.
In its post-meeting statement earlier this month, the policy committee said inflation has run below its target, with low energy prices contributing to the lag. It added that global economic trends could put "further downward pressure on inflation in the near-term."
On Thursday, she briefly mentioned international developments, saying "global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity somewhat further."
Yellen said the inflation shortfall will likely "prove transitory." She added that low inflation can have significant costs, but it would likely move toward the Fed's 2 percent target as the economy nears full employment.
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Yellen said the U.S. economy is "not far away from full employment" and touted progress in the labor market. She added that the unemployment rate would likely fall if easy policy continues.
— CNBC's Steve Liesman and Alex Crippen contributed to this report.