“What it really suggests is banks can be in the business but there will be constraints in terms of how far they can go,” said Gilbert Schwartz, partner at the Washington law firm Schwartz and Ballen LLP.

Fed officials are also considering how firms could face reputational risk from having extensive operations in basic commodities important to businesses and consumers.

“The Fed is working on a new standard that will permit banks to remain in physical commodities, but impose higher capital and other regulatory standards that might make the banks want to stop doing it,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm.

Yellen's comments reinforce “the very long view at the Fed that they don't like non-traditional activities in banks,” Shaw Petrou said.

More information about the Fed's approach to commodities will come in testimony on the topic by Michael Gibson, the Fed board's director of bank supervision and regulation, on Nov. 20 before a subcommittee of the Senate Banking Committee.

U.S. law restricts banks from owning non-financial businesses unless they get special exemptions. Goldman Sachs Group Inc. and Morgan Stanley were the two biggest U.S. securities firms until they converted into banks in 2008. A 1999 law “grandfathers” any commodities operations they had before Sept. 30, 1997.

The Fed said in July that it's reconsidering its landmark 2003 decision to grant some lenders, such as Citigroup Inc. and JPMorgan Chase & Co., permission to expand into raw materials.

Yellen made the comments today in response to a question from Senator Jeff Merkley, an Oregon Democrat. She spoke at a hearing on her nomination to succeed Fed Chairman Ben S. Bernanke, whose term expires Jan. 31.

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