Federal Reserve Chair Janet Yellen said the U.S. economy faces a number of global threats that could hamper growth, but is still sticking to a plan of slowly hiking interest rates back to a more normal level over time.

In her semiannual report to Congress, Yellen spoke about the widening fallout from concerns over China's weaker currency and economic outlook, which is rattling financial markets around the world.

Since Yellen moved to hike rates for the first time since 2006 in December, oil prices have worsened, the stock market has been in a tailspin, and there are more and more signs of worry in the global economy.

But the world's largest economy, America's, has quietly been chugging along. While GDP slowed to 0.7 per cent to end last year, the latest data shows the U.S. jobless rate has fallen to under five per cent — its lowest level since Barack Obama was named president in 2008.

But "while labour market conditions have improved substantially," Yellen said, "there is still room for further sustainable improvement."

Yellen was asked by more than one lawmaker whether the central bank is currently considering a negative interest rate policy, a tool of last resort that some central bankers have used to stimulate their economies. Yellen was cagey in her replies to those questions.

"I am not aware of anything that would prevent us from doing it, but I'm saying we have not fully investigated the legal issues," she said at one point. "That still needs to be done."

Indeed, while the Fed expects to raise interest rates gradually that plan is not written in stone, nor is it on any sort of timeline, she said Wednesday. The Fed would likely move slower if the situation called for it, but she said "I don't expect the Fed is going to be soon in the situation where it is necessary to cut rates."

In her first public comments in two months, Yellen offered no major surprises. She reiterated the Fed's confidence that the U.S. economy was on track for stronger growth and a rebound in inflation. At the same time, she acknowledged the weaker economic data reported since the start of the year and made it clear the Fed is closely monitoring greater risks from abroad.

Yellen did mention in her prepared comments to the House Financial Services Committee that it was possible that the recent economic weakness could prove temporary, setting the stage for faster economic growth and a stronger increase in inflation than expected. Should that occur, the Fed will be ready to hike rates more quickly than currently anticipated.

"The actual path of the (Fed's key interest rate) will depend on what incoming data tell us about the economic outlook," Yellen said.

After the Fed began raising rates late last year, economists widely expected the central bank to continue to boost its benchmark rate gradually but steadily, most likely starting in March. But private economists have trimmed their expectation for four quarter-point hikes this year down to perhaps only two, with the first hike not occurring until June at the earliest.

James Marple at TD Bank is among those who still thinks the Fed is in a mood to hike rates at some point soon. "Despite the move in market expectations to price out rate hikes completely in 2016, we still view two rate hikes this year as a material probability," he said in a note Wednesday.

Yellen's  testimony included her most extensive comments on the situation in China. The data so far do not suggest that the world's second largest economy was undergoing a sharp slowdown, Yellen said. But she added that recent declines in the country's currency have intensified concerns about China's future economic prospects.

"This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth," Yellen said.

U.S. GDP growth slowed sharply in the fourth quarter of 2015, dropping to a meager rate of 0.7 per cent. Yellen attributed the result to weakness in business stockpiling and export sales. But she noted that economy is being fuelled by other sectors including home building and auto sales.

Yellen said that the sharp declines in U.S. stock prices, rising interest rates for riskier borrowers and further strength in the dollar had translated into financial conditions that are "less supportive of growth."

"These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices could provide some offset," she said.

Yellen said that the U.S. labor market remains solid, creating 150,000 jobs in January. That was enough to push the unemployment rate down to 4.9 per cent.

Scotiabank economist Derek Holt said in a note that the job market should be the main data point the Fed pays attention to in setting its rate policy. "History suggests it is the wages data the Fed should be paying attention to the most as … the Fed usually reacts to this too late and has to over-tighten later in damaging fashion," he wrote in a note to clients Wednesday.

Inflation, however, has continued to fall below the Fed's target of 2 per cent annual price increases. The shortfall has been steeper recently because of the renewed drop in oil prices and stronger dollar, which holds down U.S. inflation by making foreign goods cheaper for American consumers.

But Yellen said the central bank still believes that energy price declines and stronger dollar would fade in coming months. Inflation should also begin to move closer to 2 per cent as a healthy labour market pushes up wages, she said. Worker pay has started to show its first significant gains since the Great Recession ended 6½ years ago.

With files from The Associated Press