"I expect the economy to slow" as it transitions to stable growth, she told ABC's "This Week," but "I don't think a recession is at all inevitable."
The U.S. economy has rebounded fiercly from the damage wrought by COVID-19, but skyrocketing inflation and supply-chain snarls made worse by the war in Ukraine have increased pessimism.
Wall Street stocks fell after the central bank, aiming to cool inflation, on Wednesday lifted the benchmark borrowing rate by 0.75 percentage points, the steepest rise in nearly 30 years.
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Economists see worrying signs that consumer confidence is weakening, with spending on services affected most sharply.
People are starting to drop vacation plans – domestic flight bookings were down 2.3 percent last month, Adobe Analytics reported – and are cutting back on restaurant visits, haircuts and home repairs.
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Yellen conceded that "clearly inflation is unacceptably high," attributing it partly to the war in Ukraine, which has pushed up energy and food prices. But she said she did not believe "a dropoff in consumer spending is the likely cause of a recession."
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The U.S. labor market is "arguably the strongest of the postwar period," Yellen said, and she predicted a slowing of inflation in coming months. For Fed chair Jerome Powell – who succeeded Yellen in that position – to control inflation without weakening the labor market will take "skill and luck," she said, before adding, "but I believe it's possible."
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The U.S. economy contracted by 1.5% in the first quarter of this year, its first drop since 2020, and early indications point to a continued slowing in key sectors including manufacturing, real estate and retail sales.
A recent survey of 750 company executives by the Conference Board found 76 percent believed a recession is looming, or has already begun. A recent analysis from the non-profit business group predicted a period of "stagflation" – stagnant growth coupled with inflation – in 2023.
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Economist Larry Summers, who served as Treasury secretary from 1999 to 2001, said a wide range of indicators – market volatility, interest rates and inflation among them – suggest a recession on the horizon.
"All of that tells me that ... the dominant probability would be that by the end of next year we would be seeing a recession in the American economy," Summers told NBC's "Meet the Press."
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