She also repeated the Fed’s two criteria for raising rates, which have been kept near zero since December 2008: “I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term.”

Policy makers expect growth to pick up after stalling in the first quarter, even as they fret about the strength of the consumer spending that makes up two-thirds of the economy, minutes of their April meeting released Wednesday show.

Yellen said it will be best to proceed “cautiously,” which means taking “several years” before policy makers lift the federal funds back to its normal, longer-run level.

Even after significant employment gains, the labor market “is approaching its full strength,” though still short of it, Yellen said. While the U.S. is nearing what many economists say is full employment, the jobless rate “probably does not fully capture the extent of slack in the labor market,” she said.

Eoin Treacy's view

Today’s news that discount fashion retailer Ross Stores has joined Wal-Mart, T.J.Maxx and Target in raising their starting wage to $9 suggests that companies are seeing tightness in the labour market. This is follows the decision this week that Los Angeles will be raising its minimum wage to one of the highest in the world by 2020. The Fed will be watching these developments closely not least because these are such large employers. 

It is a testament to just how different this cycle is that the Fed is waiting until the labor market is at full capacity before raising rates. Usually they have been raising rates for a while before when the labour market is at full capacity. On this occasion the addiction to liquidity the Fed has imbued the market with is leading to its being very tentative indeed.