Yellen's semiannual report on monetary policy is her first since Donald Trump became president by vowing to speed USA economic growth, which could push the open market committee to pick up the pace of rate increases if such steps fan higher inflation.
The US economy is expected to continue to expand at a moderate pace and waiting too long to raise rates would be unwise, the Fed Chair Yellen said in prepared remarks to the Congress.
In December, the Fed modestly raised its benchmark short-term rate to a range of 0.5 percent to 0.75 percent, its first increase since December 2015.
Trump has announced a rollback of financial regulation with few details and there is no clarity on the size and scope of the tax cuts he has promised, while possible new taxes on imports and increased infrastructure spending could boost inflation.
Since the central bank enacted historically accommodative policies following the 2008 financial crisis, the USA actually has grown faster than most other parts of the world and has a strong banking system, she said. If pressed on how the Fed will react to expansionary fiscal policy, Perli said, she may have little choice but to point out, as she has in the past, that fiscal stimulus that arrives when the economy is near full employment will probably require higher interest rates.
"People want to put money into that because they want to believe that growth will be stronger, that inflation will be more of an issue - a more normal economy, in other words", said Paul Christopher, head market strategist for Wells Fargo Investment Institute in St. Louis.
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Chris Rupkey, chief financial economist at MUFG Union Bank in NY, said that Yellen not only hinted at a rate hike but gave a clear indication that she did not want to be behind the curve by moving too slowly.
In a tense hearing before the House of Representatives' Financial Services Committee, Republicans made clear they will keep pressing the Fed to trim its large holdings of bonds and set interest rates based on established mathematical rules. If that were to happen, the central bank could decide to accelerate its rate hikes.
"I think market participants likely are anticipating shifts in fiscal policy that will stimulate growth and perhaps raise earnings", Yellen said, responding to a question about what is behind the markets' rally. "Last year's sales of automobiles and light trucks were the highest annual total on record".
"Inflation, or a lack thereof, has always been a problem for the Fed with policymakers clearly wanting to begin and then speed up the tightening process but it seems, gradually, pressures are building", he added.
Federal Reserve Board Chair Janet Yellen testifies before the Senate Banking Committee at Capitol Hill in Washington.
Across the Atlantic, the dollar was on the front foot against the majority of its rivals, after Janet Yellen told the Senate Banking Committee that interest rates are likely to rise sooner rather than later. Doing so, however, would further strengthen the dollar - which is already stronger than it has been in more than a decade (too strong, according to the president) - much to the detriment of Trump's economic plans. Michael Crapo, R-Idaho, said he hoped the Fed would cooperate with the Trump administration in its efforts to reduce financial regulation.