(Bloomberg News) Federal Reserve Bank of Kansas City President Esther George said that central bank policy makers must consider whether they are increasing the odds of instability in the financial system.

"Policy choices that attempt to speed improvement in the housing and labor markets can be attractive given these circumstances," George said, referring to the "weak housing market, high unemployment and impaired bank balance sheets."

"But this desire must be traded off against the need to foster long-term stability within our financial sector," she said in her first speech since becoming a regional Fed president in October.

The remarks indicate that George shares a key concern of her predecessor Thomas Hoenig, who dissented from all Fed policy decisions in 2010 with the warning that a prolonged period of zero-interest rates could provoke turmoil in financial markets. Fed regional bank presidents rotate voting on monetary policy, with George first voting in 2013.

Asked whether the Fed could do more to stimulate economic growth and bring down unemployment, George said that such actions may run risks.

"My view is that the economy is going through a deleveraging process and that takes time," George said in response to an audience question. "Efforts to speed up that process run some risks. It's going to take things other than interest rates to stimulate that economy."

"The actions we've taken will have some time to play out as it is and we'll have to see how data come in to make the decision about whether any further action is appropriate," George said.

Some institutions appear to be increasing their exposure to risk, George said in her speech.

"Some bankers with strong balance sheets tell me they must react to the current environment by taking on more risk," she said. "While appropriate risk-taking is fundamental to banking and desirable in this environment, creating conditions that encourage the financial system to take on mispriced risk could lead to distortions that will only haunt us later," she said.

Bank Supervision

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