Yellen says economy on track ahead of expected rate hike

Yellen gave an upbeat assessment of the economy's progress since the Fed's last meeting in October, describing it as in line with its expectations for the labor market and inflation.

But she adds that policymakers need to be more cautious in deciding when to start raising rates, given that it doesn't have much room to cut them if the economy begins to falter.

Yellen's comments in a speech to the Economic Club of Washington came two weeks before the Fed's final meeting of the year on Dec. 15-16. The central bank is widely expected to raise interest rates for the first time in nearly a decade. The Fed's benchmark rate has been at a record low near zero for the past seven years.

Yellen said that the economy has recovered "substantially" since the Great Recession of 2007-2009, and she expressed confidence that it will continue growing at a pace strong enough in coming months to further boost the labor market.

"When the (Fed's policy committee) begins to normalize the stance of policy, doing so will be a testament ... to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession," Yellen said.

While the unemployment rate fell in October to a seven-year low of 5 percent, Yellen said she did not believe the labor market was at "full employment" yet because there are still too many discouraged workers who have given up looking for a job. Wage growth is also weaker than it should be, and too many people who want full-time work can only find part-time jobs, she said.

She said she was also optimistic that inflation, which has been running below the Fed's 2 percent target, would start moving higher as the temporary impacts of a stronger dollar and falling energy costs begin to fade.

"I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labor market slack, and a rise in inflation to our 2 percent objective," Yellen said.

In addition to her Wednesday speech, Yellen is scheduled to testify on the economy before the Congressional Joint Economic Committee on Thursday.