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 Despite strong recent jobs reports and other signs of continuing
recovery, Yellen emphasized in testimony to the Senate Banking
Committee that she won't conclude the economy has recovered until
wages start rising and discouraged workers return to the labor
force.
In its latest semiannual report to Congress, the Fed did cite unease
about some aspects of U.S. securities markets, taking the unusual
step of singling out biotechnology and social media stocks for their
"stretched" valuations.
The observation hit biotech stocks with some of their biggest losses
in months, while social media companies like Yelp slid as much as 4
percent.
But Yellen's overall testimony and an accompanying written report to
Congress said asset values were in line with "historic norms," and
that the economy would continue to grow if supported by the Fed's
current low interest rates.
 Yellen said the one thing that might prompt the central bank to
raise rates earlier or faster is if hiring and wages take off in an
unexpected way. So far, there is little evidence that is happening
in a country with still high unemployment, and labor force
participation at its lowest level in a quarter century.
"While we are making progress in the labor market we have not
achieved our goal," Yellen told the committee. "There have been
substantial headwinds holding the recovery back ... Until they are
completely gone it calls for an accommodative monetary policy."
Wage increases "have been nonexistent," she said. "We have seen a
steady shift of national income from labor to capital, and there is
room for wage gains before we are worried" about inflation.
 U.S. stock markets dipped after the release of Yellen's testimony
and the accompanying report, as investors assessed whether her
comments about specific stock sectors were a warning shot akin to
former Fed Chair Alan Greenspan's remarks about irrational
exuberance or a footnote in an assessment that sees the U.S. economy
generally making progress.
Cornerstone Macro's Roberto Perli said it was significant that
Yellen's testimony was not as pointed regarding stock values as the
written Fed report.
"I don't see Yellen or the Fed changing their mind anytime soon,"
about the path of interest rates, currently expected to be increased
in the middle of next year, Perli said. He called the observation
about stock values a "rhetorical side note."
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FED RELATIVELY UPBEAT
Yellen described an economy that continues to generate jobs and
relatively steady growth. Yet Fed policymakers currently expect
their preferred measure of inflation to stand at between 1.5 percent
and 1.75 percent for 2014, short of the central bank's 2 percent
target.
Fed chiefs report to Congress twice a year on monetary policy, and
the hearing on Tuesday was Yellen's second such appearance. Her
first turned into a marathon grilling.
This one was shorter with few sharp exchanges.
One exception: Senators who feel the Fed has not done enough to fix
leftover issues from the financial crisis, such as how to handle
banks considered too big to fail.
Massachusetts Senator Elizabeth Warren, a Democrat, pressed Yellen
on whether the Fed is doing enough to make banks like JP Morgan
develop plans that would allow for an orderly bankruptcy without
taxpayer support.
Those resolution plans, Yellen said, number in the tens of thousands
of pages and are "complex ... We need to give these firms feedback"
to fine tune their plans.
(Reporting by Howard Schneider; Additional reporting by Rodrigo
Campos in New York; Editing by Paul Simao)
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