Fed's George: Prepared for rate hike, despite selloff

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Federal Reserve Bank of Kansas City President Esther George said Wednesday it's important for the nation's central bank to understand this week's extreme stock market volatility, but cautioned that markets are focused on the near term.

Asked whether the market movements will influence the Fed's decision to raise rates, she said, "Policymakers are always trying to divine whether the forecast should adjust because of what they've seen. I think you have to be particularly careful when markets move, whether that is a signal of something more fundamental or whether it is a readjustment of some sort."

She reiterated her long-standing view that the Fed should normalize interest rates.

"This week's events complicate the picture but I think it's too soon to say it fundamentally changes that picture, so in my own view, the normalization process needs to begin and the economy is performing in a way that I think it's prepared to take that."

George spoke to CNBC in an interview from Jackson Hole, Wyoming on Wednesday ahead of the Fed's annual retreat. She is not a voting member of the Federal Open Market Committee, which could vote at its September meeting to raise interest rates for the first time in nine years.

The Fed has held its benchmark fed funds rate near zero since December, 2008.

On Wednesday, New York Federal Reserve President William Dudley said a rate hike looks less compelling than it had a few weeks ago in part due to market volatility.

Read More Fed's Dudley: September rate hike looks less compelling

George said it was important to remember markets have been in a period of a highly accommodative policy and the Fed had put in place tools that were targeted at asset values.

"When you affect those kind of prices for a long period of time, I expect we're going to see that kind of volatility," she said. "And so the question is to what degree, and how are we positioned to deal with that?"

George acknowledged that the Fed's monetary policy in recent years has influenced asset values, but asserted the central bank was clear about how quantitative easing would impact markets.

"Whether that means assets are overpriced, I don't know. But I do know it introduces an important factor to how assets are priced in the economy."

Disinflationary pressures will likely continue for some time but they are likely transitory, George said. The economy should be able to move past those pressures as the economy and labor markets continue to improve, she said.