The speech to the Economic Club of New York made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate.
The US currency weakened versus its major peers.
The dollar has slumped almost 5% since the end of January on speculation US policy makers will adjust plans based on a dimming outlook for global economic growth.
“We were prepped for a dovish Yellen, but somehow she still managed to exceed our own expectations,” said Bipan Rai, director of foreign-exchange strategy in Toronto at CIBC World Markets unit.
“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Ms Yellen said in the text of prepared remarks Tuesday.
US Treasuries extended gains following her remarks.
US stocks erased earlier losses, with the Standard & Poor’s 500 Index was up 0.2% at one stage in New York, after falling as much as 0.4%.
“Yellen has doubled down on the dovishness from the March statement and press conference,” said Neil Dutta, head of US economics at Renaissance Macro Research in New York.
“Global economic developments are cited very prominently,” he said.
Fed officials left their benchmark lending rate target unchanged this month at 0.25% to 0.5% while revising down their median estimate for the number of rate increases that will be warranted this year.
Ms Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”
“While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed,” she said.
Ms Yellen mentioned two risks in her speech. Growth in China is slowing, she noted, and there is some uncertainty about how the nation will handle the transition from exports to domestic sources of growth.
A second risk is the outlook for commodity prices, and oil in particular.
Further declines in oil prices could have “adverse” effects on the global economy, she said.