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Investors too complacent on rates: Fed's George

Investors should not get too comfortable in the belief that Federal Reserve interest rate hikes are a long way off, said Esther George, hawkish president of the Kansas City Fed, which hosts the central bank's annual monetary summit in Jackson Hole, Wyoming.

"There's a lot of complacency right now, and if you look at the market path for interest rates relative, for example, to … the FOMC's projections, you will see that those have been far apart," George said in a "Squawk Box" interview aired Thursday, a day before Fed Chair Janet Yellen addresses the conference.

Read MoreFed surprises with hawkish tone, but will Yellen?

The minutes from the Fed's July meeting, released Wednesday, showed that policymakers discussed raising rates sooner, but they continue to disagree on how much the U.S. labor market is improving.

"I think the economy is already showing signs [of improvement]," George told CNBC. "I don't want us to be behind the curve in beginning to normalize interest rates."

"I don't want us to be behind the curve," KC Fed President Esther George says.
Source: Federal Reserve Bank of Kansas City
"I don't want us to be behind the curve," KC Fed President Esther George says.

"When you see the economy getting as close as we are to full employment, to stable inflation, it would suggest to me that the time has come to do that," she continued. "It's a process though."

Read MoreJackson Hole confab will zero in on labor
Read MoreFed to take longer, do less on rate hikes: Survey

Many economists expect the Fed to pull the trigger on rates next summer.

While refusing to pinpoint a time frame, the Kansas City Fed president said, "The markets should always be looking at how the economy is unfolding, because I doubt that the committee will be picking a date."

But she did say that the Fed's policymaking committee will strive to "communicate clearly" its reaction to the data. George, who has been calling for rate hikes, is not a voting member this year on the Federal Open Market Committee, the unit that directly decides rate moves by the central bank.

Read MoreFed behind the curve, has too much clout: Survey

As to whether near-zero rates are creating bubbles in financial markets, she said: "I learned from my experience as a bank examiner that trying to decide when risk hits the point at its peak or being a bubble is really difficult to do."

"But what you can do is see when incentives to reach for yield are present," she continued, "and I think you see that in various parts of the market today. With negative real rates, you're going to see that kind of reach for yield."

She said policymakers need to keep that in mind when "responding to the current state of things."

Regarding the job market, George said she's been encouraged by the labor market over the last three years.

Read MoreUS claims slide back below 300K as thaw continues

"We are beginning to see the long-term unemployed come back as the labor market improves," she said. "I think the question for us today is where are we able to match skills."

"We know that jobs are changing, they're high-skilled jobs, low-skilled jobs," she continued, "and I think that is really the challenge for the economy is where are we going to come out with finding people that can fit the jobs that we have."

—By CNBC's Matthew J. Belvedere. Reporting by CNBC Senior Economics Correspondent Steven Liesman.

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