"It's appropriate, and I've said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate," she said in response to a question at Harvard's Radcliffe Institute for Advanced Study.
Her remarks comes as colleagues on the Fed's policymaking committee have pointed to an increase in the federal funds rate target sooner rather than later. Yellen has expressed caution this year on rates, as inflation lags below the Fed's 2 percent target and global risks persist.
"The economy is continuing to improve," Yellen said, adding that she sees growth picking up after a sluggish first quarter . Yellen added that oil prices and the dollar are "roughly stabilizing," which would help to push inflation toward the Fed's goal.
The Fed's policymaking committee meets on June 14 and 15. Markets priced in a roughly 28 percent chance of a hike in June and 57 percent in July before Yellen spoke, according to the CME Group. Those chances rose to 34 and 62 percent for June and July, respectively, after her comments.
The Federal Open Market Committee's April meeting minutes released this month showed most policymakers would support a hike in June if economic data improved as expected.
On Thursday, FOMC voters continued to hint a hike may come in the near future. Fed Governor Jerome Powell said an interest rate hike could be appropriate "fairly soon," adding that he supports gradual increases if data underpin forecasts for an improving economy.
Earlier Thursday, St. Louis Fed President James Bullard told reporters he believes markets "read the minutes correctly" when they priced a higher chance of a hike.
Yellen on Friday said the Fed needed to avoid raising rates too quickly, as it could cause a slowdown.
"If we were to raise interest rates too steeply and we were to trigger a downturn or contribute to a downturn, we have limited scope for responding, and it is an important reason for caution," she said.
Aside from her comments on rates, Yellen gave a broader assessment of the U.S. economy. She said it has made "a great deal of progress" in the "slow recovery" since the global financial crisis.
Yellen highlighted improvement in the labor market, saying it has nearly reached a point that most economists would associate with full employment. However, she outlined out some areas of weakness, including wage and productivity growth.
One widely followed market watcher did not think Yellen's comments necessarily meant the Fed will hike in June. DoubleLine Capital's Jeffrey Gundlach said Yellen's remark "doesn't suggest" a hike in June, according to Reuters.
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