In her first public comments in two months, Yellen said the economy is improving to the point that policy-makers soon could nudge up the benchmark federal funds rate for the first time since December. She did not give a timetable.
"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said in remarks to a central bankers conference in Jackson Hole, Wyo.
She said the U.S. economy is continuing to expand, "led by solid growth in household spending." But she said business investment has been soft, and U.S. exports have been held back by "subdued foreign demand" and the strong dollar.
Still, the U.S. labor market has shown recent strength, with an average of 190,000 net new jobs a month from May through July, she said.
"While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market," Yellen said.
In saying the Fed expects moderate economic growth, "additional strengthening in the labor market" and inflation rising toward the central bank's annual 2 percent target, Yellen appeared to be preparing financial markets for a potential rate increase after the central bank's Sept. 20-21 meeting.
But as she continually does, Yellen warned that "the economic outlook is uncertain" and the Fed's monetary policy is not "on a preset course."
Chris Rupkey, chief financial economist at Mitsubishi UFG Financial Group, said Yellen's statement "is an old-fashioned signal that they are very likely to raise rates on Sept. 21."
Other analysts were not so sure.
"She was very careful to talk in broad generalities, which gives her the opportunity to keep September on the table," said Lindsey Piegza, chief economist at the brokerage firm Stifel Nicolaus & Co.
But Yellen's comments "give her enough flexibility that if the data don't evolve as she expects she can clearly push that off until later in the year or 2017 as needed," Piegza said.
Maryland economists said that if the Fed decides to raise interest rates, the increase would likely be relatively small, affecting consumers through mortgages and auto loans.
"It's going to have, frankly, a marginal effect on the economy," said Peter Morici, a professor at the University of Maryland's Smith School of Business and a former director of the Office of Economics at the U.S. International Trade Commission. "They're going to move so tepidly that I don't see this having much consequence."
Morici believes any move from the Fed would come after the November presidential election. Pushing the increase later in the year also could diminish its impact on the economy and consumers, he said.
Any increase in interest rates by the Fed has consequences for consumers and businesses, said Kerry Tan, an assistant professor of economics at Loyola University Maryland. Much as higher mortgage rates affect housing affordability for buyers, companies facing higher rates to finance a new project, the purchase of equipment, or research and development might hold off, he said.
"If the interest rates go up, it would have a negative effect not only on consumer spending but also spending by companies for similar reasons," Tan said.
At the same time, raising the interest rate is a sign that policy-makers have confidence in the economy, he said.
A widely watched gauge by the CME Group futures exchange put the odds of a 0.25 percentage point increase in September at 24 percent after the speech. That was up from 21 percent Thursday.
The policy-making Federal Open Market Committee held the rate at between 0.25 percent and 0.5 percent at its July meeting.
Fed Vice Chairman Stanley Fischer said Friday that Yellen's comments were consistent with a potential rate increase in September and another one before the end of the year. But he cautioned in a CNBC interview that the Fed's decision would depend on economic data, such as Friday's report on August job growth. That report "will probably weigh in our decision," Fischer said.
Economists forecast that the U.S. economy added a solid 180,000 net new jobs last month, down from a strong 255,000 gain in July, and that the unemployment rate would fall to 4.8 percent. Such a report could tilt Fed officials toward a rate increase.
Baltimore Sun reporter Sarah Gantz contributed to this article.