Washington - Federal Reserve Chairwoman Janet Yellen sought to tamp down anxiety about the increase in interest rates the central bank is increasingly likely to adopt as early as June this year, assuring lawmakers at a hearing of the Senate Banking Committee that interest rates would remain lower than normal as the economy shakes off the effects of the recession and financial crisis.

While sounding an upbeat tone about the economy, Yellen also said that inflation was still running lower than the Fed's 2 percent target and that there was "room for improvement" in labor markets.

"We do see that the labor market is improving and we're getting closer to our goal of maximum employment," she said. And she said that when it comes to inflation, "we do have to be forward looking in setting monetary policy." But she added that "we don't see the labor market as fully healed."

She said "if conditions improve" as the Fed anticipates, the Fed would consider increasing the Fed funds rate "on a meeting by meeting basis."

She cautioned that the Fed might hold interest rates low even if it drops its forward guidance, which says that the central bank would remain "patient" before raising rates. Yellen has indicated that that formulation means there will probably be no change in rates for at least two meetings of the Federal Reserve Open Market Committee.

On Tuesday, she added that "modification of forward guidance should not be read as an indication that the committee will increase rates at the next couple of meetings" and that a rate hike "could be warranted at any meeting" after dropping such guidance.

Yellen also parried questions from the Senate Banking Committee Chairman Richard Shelby, R-Ala., about whether the Federal Reserve should fall under closer oversight from Congress. Shelby said that the Fed had emerged from the financial crisis as a "super-regulator with unprecedented power over entities that it had not previously overseen."

The Fed chairwoman's testimony marks the first time she has testified before a Republican-controlled Senate committee, and it comes amid calls by many Republicans for greater congressional control of the central bank.

Sen. Rand Paul, R-Ky., has called for "Audit the Fed" legislation to increase transparency and oversight of the Fed, which he and other Republicans believe has risked a return of inflation by keeping rates near zero for about six years.

"I strongly oppose 'Audit the Fed,''' Yellen said. "I believe the transparency and providing Congress and the public with adequate information to understand our operation, our financial condition, the conduct of meeting the responsibilities Congress has assigned to us is essential. But 'Audit the Fed' is a bill that would politicize monetary policy and bring short-term pressures on the Fed."

She said that the Fed is, in fact, audited in the traditional sense and showed a hefty volume she said was an outside audit by Deloitte and Touche of the Fed's financial statements.