Yellen, in a prepared testimony delivered to Congress, said the Fed would wind down its massive massive bond portfolio while keeping a close watch on the low inflation.
The testimony depicted an economy that, while growing slowly, continued to add jobs, benefited from steady household consumption and a recent jump in business investment.
Investors and some Fed officials, concerned with the recent dip in inflation, have been wanting to see a surer progress toward the central bank's goal of 2 percent inflation.
Yellen said some temporary factors appear to be at work in holding down inflation but the Fed was focused on achieving the target.
"It was a little bit more dovish than most had thought," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago.
"She said rates won't have to rise much further to get to neutral, I thought that was key. She said inflation response to economy is a key uncertainty, alluding to the inflation again, part of the dovishness."
The US central bank will also issue its Beige Book at 2 p.m. ET, a compendium of anecdotes on the health of the economy. The Fed's next policy meeting is on July 25-26.
At 12:47 p.m. ET (1647 GMT), the Dow Jones Industrial Average was up 111.34 points, or 0.52 percent, at 21,520.41, slightly easing from its record high of 2158.79.
The S&P 500 was up 16.2 points, or 0.667895 percent, at 2,441.73 and the Nasdaq Composite was up 56.47 points, or 0.91 percent, at 6,249.78.
Microsoft, Facebook and Amazon gave the biggest boost to the S&P and the Nasdaq.
Amazon shares edged up 1 percent after the online retailer said its Prime Day sale was the biggest shopping event by sales in its history.
Ten of the 11 major S&P 500 sectors were higher, with the real estate index's 1.26 percent rise leading the advancers.
The financial index, which is sensitive to rate hikes, was the only laggard and was trading little changed.
Chances of an interest rate hike at the Fed's December meeting fell to 53 percent from 60 percent after the release of Yellen's testimony, according to CME Group's FedWatch tool.
Investors will be keeping an eye on second-quarter earnings reports on Friday from big US banks including JPMorgan Chase , Wells Fargo and Citigroup.
Advancing issues outnumbered decliners on the NYSE by 2,317 to 567. On the Nasdaq, 1,995 issues rose and 763 fell.