"I expect it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy," Yellen said during a speech she delivered in Cleveland.
"But I want to emphasize that the course of the economy and inflation remains highly uncertain… We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2% in the next few years."
After Yellen's speech, US Treasury yields rose and the dollar rallied against a basket of currencies, while stocks modestly pared gains, Reuters reported.
Despite the improvement of recent years, she said labor markets remain weak, with high levels of part-time work and weak participation rates. The low unemployment, she added, can be deceiving.
"I think a significant number of individuals still are not seeking work because they perceive a lack of good job opportunities and that a stronger economy would draw some of them back into the labor force."
The Fed has kept rates near zero for almost seven years.