Janet Yellen gave a balanced reading on the health of the US economy but warned

“considerable uncertainty” about the economic outlook could lead to interest rates rising earlier or later than currently expected.

The US Federal Reserve chairwoman was presenting the Fed’s semi-annual monetary policy report to Congress, which took a dig at the valuation of social media and biotechnology stocks, saying “they appear to be stretched” relative to historical norms.

An index of biotechnology companies fell as much as 2.1 per cent and was down 1.4 per cent late morning, while the Russell 2000 index of small- caps was near its low for the day, off 1.1 per cent. The S&P 500 was down 0.2 per cent.

Ms Yellen said the jobs market had “registered notable improvements” so far this year, but the pace of economic growth “bears close watching”.

“If the labour market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned,” said Ms Yellen.

“Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”

Although Ms Yellen’s warning was carefully balanced, it makes clear that if jobs growth continues at this year’s rapid pace of 230,000 a month, it could force the Fed to raise interest rates earlier than expectations for the second half of 2015.

It marks a small but noteworthy change from Ms Yellen’s press conference in June.

Then she said rate rises could come early “if the economy proves to be stronger than anticipated”.

Her testimony implies the jobs market only has to keep improving at its current pace.

It suggests that the labour market’s strength is starting to influence debate inside the Fed, but it is offset by lingering doubts about the health of the recovery.

“The Federal Reserve does need to be quite cautious with respect to monetary policy,” she said.

“We have in the past seen false dawns, periods in which we thought growth would pick up speed and the labour market would improve more quickly,” she added.

In particular, Ms Yellen said that the housing sector “has shown little recent progress”.

“While this sector has recovered notably from its earlier trough, housing activity levelled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.”

Ms Yellen said participation in the labour force remained weaker than the ageing of the population would imply. – Copyright The Financial Times Limited 2014