Yellen, in an CNBC interview, also said that, while banks may struggle with commercial real estate and face some consolidation, there is ample liquidity in the system and that banks should generally be able to withstand any strain.

Yellen said that legislation to lift the debt ceiling and reduce U.S. deficits by more than $1 trillion over a decade would support the Federal Reserve's efforts to bring down inflation.

Asked about the Richmond Federal Reserve President Jeffrey Lacker's view that the federal funds rate, at 5.0-5.25% now, will have to rise to 6% to tame inflation, Yellen said that was a decision for the Fed.

"Consumer spending has continued to grow in a pretty robust way, but you're also seeing areas of the economy that are slowing down," Yellen said. "And this is a judgment that my former colleagues at the Fed are very capable of making. As I said, I think what's important is to try to bring inflation down. That's a top priority."

She said that banks would face some difficulties related to commercial real estate because of higher interest rates and remote work arrangements that have reduced demand for office space, but stress tests have shown that banks have adequate capital, and banking supervisors are looking closely at the situation.

"My overall read is that the level of capital and liquidity in the banking system is strong and while there will be some pain associated with this, that banks should be able to handle the strain," she said.

Asked whether she would support more consolidation among banks, she said the current diverse banking system with strong community banks, regional banks and large banks was a "strength" for the U.S. economy, but some further consolidation was likely.

Yellen said she would not want to see U.S. banking diversity threatened, "but certainly in this environment, some banks are experiencing pressure on earnings and there is a motivation to see some consolidation. And it wouldn't surprise me to see some of that going forward."