Investors will closely monitor Yellen's words as they try to gauge her plans for interest rates.
Yellen appeared before the U.S. House Committee on Financial Services to give her semiannual monetary policy report.
The U.S. dollar continued to be lower against its major counterparts in the European session on Wednesday, after the Fed Chair Janet Yellen asserted that the central bank is expected to raise rates gradually over time to attain inflationary target and sustain the economic expansion. The Russell 2000 index of smaller-company stocks picked up 11 points, or 0.8 percent, to 1,424. While the reaction to the revelation has, predictably, broken along partisan lines, members of the Senate are more likely to concentrate on passing health care legislation after Majority Leader Mitch McConnell said he is delaying the August recess by two weeks in order to get through a legislative backlog.
Yellen noted that while the USA labor market has continued to strengthen and while the US economy appears to be growing at a moderate pace, the inflation has continued to run lower than the Fed's 2% long-term objective.
Meanwhile, market participants are also awaiting testimony from US Fed Chairwoman Janet Yellen.
Similarly, a broader measure of unemployment, which also takes into account those marginally attached to the labour force and those who would like to work more, was again near its lowest levels from before the last recession, she said.
Yellen, in prepared testimony ahead of a congressional hearing, said she would "carefully monitor" U.S. economic conditions as the labor market tightens but that inflation lags Fed targets. Brent crude, used to price worldwide oils, lost 48 cents to $46.40 a barrel.
"I expect, and certainly hope, that this will go smoothly and it will be a gradual and orderly process", Yellen said.
The neutral level is the point where the Fed's benchmark rate is neither accelerating nor restraining the economy.
The next Fed meeting is scheduled for the end of the month.
The Fed "continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time", Yellen said, while reductions in the Fed's more than US$4 trillion in securities are likely to begin "this year".
She said in January that the labour market was "reasonably close" to the committee's maximum employment objective, for instance, and that the cyclical element of participation declines had "largely" disappeared. The Fed's main gauge for inflation, the personal consumption expenditures price index, rose only 1.4 percent in May from the previous year.