Yellen testified before the Joint Economic Committee about the current economic outlook and monetary policy, in what many expect to be her final address to Congress as Fed chair.
Yellen is set to be replaced by Federal Reserve Governor Jerome Powell in February.
Before then, the U.S. central bank will meet in December to decide whether to increase the key rates.
"We continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation around the [Federal Open Market Committee's] 2 percent objective," she said in prepared remarks. "That expectation is based on the view that the current level of the federal funds rate remains somewhat below its neutral level -- that is, the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. The neutral rate currently appears to be quite low by historical standards, implying that the federal funds rate would not have to rise much further to get to a neutral policy stance."
The current rate is between 1 percent and 1.25 percent. On Tuesday, Powell told a separate congressional panel he expects interest rates "to rise somewhat further."
Earlier this month, the Fed voted to leave rates alone.
The committee raised the target range for the federal funds rate by a quarter of percentage point at both its March and June policy meetings.
Yellen said the domestic economy is estimated at a 3 percent increase in the second and third quarters of this year, despite the damage caused by hurricanes this summer.
"We are not seeing undue inflationary pressure in the labor market, so our policy remains accommodative," Yellen said. "But we do think it's important to gradually move our policy rate toward what I'll call a neutral level, which would be consistent with sustainably strong labor market conditions."
Yellen said the Fed does not want to stifle growth but feels strongly about keeping consistent with a labor market nearing full employment. She also gave a rosy view of the present state of the domestic market.
"The U.S. economy has strengthened further this year," she said. "Smoothing through the volatility caused by the recent hurricanes, job gains averaged about 170,000 per month from January through October. ... With the job gains this year, 17 million more Americans are employed now than eight years ago."
Yellen pointed out that the unemployment rate, which stood at 4.1 percent in October, has declined 0.6 percent since the start of 2017 -- and is nearly 6 percent below its peak in 2010.