The Federal Reserve still thinks the U.S. economy warrants tighter monetary policy. But not all that much and at a slow and steady pace.

That was the markets' takeaway after a measured appearance by Fed Chair Janet Yellen on Capitol Hill. Her testimony soothed fears of a central bank moving too fast, while bolstering confidence in the U.S. economic recovery. 

Watch: Who is Gary Cohn - Janet Yellen's Potential Replacement at the Federal Reserve?

The S&P 500 gained 0.74% and the Nasdaq added 1.1%. The Dow Jones Industrial Average rose 0.58% to close at a new record of 21,533, superseding the last record notched on June 19. 

In prepared testimony before Congress, Yellen reiterated that rate increases would be gradual. Like Fed Gov. Lael Brainard, Yellen does not expect rates will have to rise by too much to reach neutral.

"Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance," Yellen wrote in prepared testimony. "The Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades."

Yellen made those comments during her semiannual testimony on monetary policy to the House Financial Services Committee. Yellen will next appear before the Senate Banking Committee on Thursday, July 13, at 10 a.m. ET.

"With an eye toward the future, Yellen says the longer-run neutral level of the benchmark federal funds rate, or the point where no further rate hikes are immediately warranted, could well be below where it was in the past," Bankrate.com senior economic analyst Mark Hamrick said in a note. "That dangles the possibility that fewer rate hikes could be in store in the intermediate term."

Also in her testimony, Yellen said that the central bank will likely begin unwinding its $4.5 trillion balance sheet this year, while closely monitoring low-inflation trends. Yellen said she anticipates the balance sheet will be "appreciably below" current levels as the Fed unloads its bond portfolio, though likely still higher than levels before the 2008 financial collapse. 

On inflation, Yellen said recent weak inflation trends were tied to "a few unusual reductions in certain categories of prices" and that the Fed was "carefully monitoring" incoming data.

In an answer to a question on whether the Fed should allow inflation to move closer to its 2% target before making additional hikes, Yellen pointed to "temporary factors [that] appear to be at work," including lower cell phone plan and prescription drug prices. Yellen also said it was "premature to reach the judgment" that the economy was not heading toward 2% inflation over the next couple of years, particularly as the strength of the labor market feeds through into upward pressure on wages and prices. Again, Yellen reiterated that monetary policy was not on a preset course and would be adjusted if it appears an undershoot in inflation proved "persistent." 

No Fed monthly meeting this year has chances greater than 50% of seeing another rate hike from the central bank. The closest, the December meeting, has a 0.25% interest rate increase at a 47.3% likelihood, according to CME Group fed funds futures. 

The Fed's Beige Book, released Wednesday afternoon, backed Yellen's confidence in U.S. economic strength. All 12 Fed districts saw their economies expand over the survey period, while wages and inflation rose "modestly." The U.S. economy grew at a "slight to moderate" pace over the six-week stretch. The Philadelphia region did warn that apparel sales had continued to be hit and that a "surge in retail bankruptcies" had hurt the sector. 

Crude oil prices rose after a sharp drop in weekly inventories data from the Energy Information Administration. U.S. crude stockpiles dropped by 7.6 million barrels in the past week, far steeper than an anticipated decline of 2.85 million. Gasoline stockpiles fell, while distillates rose. Crude inventories have declined for two weeks in a row.

The EIA reduced its price forecasts for West Texas Intermediate over the next two years in its monthly report out on Tuesday, July 11. The U.S. agency expects crude to end the year at $48.95 a barrel, 3.6% lower than its previous forecast in June.

West Texas Intermediate crude rose 1% to settle at $45.49 a barrel on Wednesday.

Yellen had quite the day.
Yellen had quite the day.

The second-quarter earnings season kicks off at the end of the week with a number of notable reports from the banking sector. Citigroup Inc. (C) , JPMorgan Chase & Co. (JPM) , PNC Financial Services Group (PNC)  and Wells Fargo & Co. (WFC) are each set to disclose their quarterly financial performance on Friday morning.

Citigroup and Wells Fargo are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells C and WFC? Learn more now.

Overall, analysts anticipate another quarter of above-average strength. CFRA Research said it anticipates 6.2% year-over-year earnings growth among S&P 500 companies, better than a 1.7% earnings decline seen in the same quarter a year earlier. The energy sector is expected to lead the pack, recovering from weakness over the previous two years.

Twitter Inc. (TWTR)  rose 3% after naming Ned Segal its new chief financial officer, assuming the position from Anthony Noto, who will remain the social media company's operating chief. Segal last served as senior vice president of finance for Intuit Inc.'s small business group.

Prior to that, Segal spent nearly 17 years at Goldman Sachs Group Inc., where he worked as the head of global software banking.

Watch: Goldman Sachs Alumni Aren't Just in the Trump Administration - They're Everywhere

Fastenal Co. (FAST)  fell 2% despite topping quarterly estimates on its top- and bottom-lines. Earnings of 52 cents a share exceeded expectations by 2 cents. Revenue surged 10.9% to $1.12 billion, coming in $10 million higher than estimates. 

American Airlines Group Inc. (AAL) gained 4% after raising its second-quarter outlook on increased passenger yields. Total revenue per available seat mile is expected to climb by 5% to 6% from the same quarter a year earlier. The company had previously forecast an increase of 3.5% to 5.5%. 

Nvidia Corp. (NVDA) increased 4% after SunTrust Robinson Humphrey upgraded its rating to buy from hold and set a $177 price target. Analysts anticipate upside to revenue and earnings over the next year. The firm increased its fiscal 2018 earnings guidance. 

GrubHub Inc.  (GRUB)  increased 3% after Cowen upgraded its rating on the food delivery ordering service to outperform from market perform and bumped its price target to $54 from $45. The firm relied upon a consumer survey to conclude that demand for online delivery was on the rise, particularly among younger users.  

NRG Energy Inc. (NRG) rocketed nearly 30% higher after outlining plans to raise $4 billion through asset sales. The proceeds will be used to partially pay down its debt by $13 billion. The power company also agreed to cut costs over three years. 

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