By Michael S. Derby 

Federal Reserve Bank of Kansas City President Esther George said Tuesday more rate rises are needed, and she warned there may be signs of looming stress inside the financial system.

"Gradual further increases in our policy rate will be necessary to return policy to a neutral stance, although there is considerable uncertainty about exactly how far or fast we need to go," Ms. George said in the text of a speech prepared for delivery before an event at her bank.

Ms. George isn't a voting member of the interest-rate setting Federal Open Market Committee. She has been one of the Fed's most aggressive supporters of rate rises. She spoke on the same day as Fed Chairman Jerome Powell, who started the first of two days of testimony before Congress. He told legislators the economic outlook is solid and called for gradual rate rises.

"The U.S. economy is in excellent shape, operating with tight labor markets and low and stable inflation," Ms. George said. But she added trade issues are a risk for the economy, and she added a note of concern about the financial sector.

"Financial stress may be building in some sectors," Ms. George said. "The corporate bond market and subprime borrowers appear to be at some risk should interest rates rise sharply," she said, adding "asset prices remain elevated."

Ms. George also said, "I am concerned that regulators are not doing more to build resilient capital buffers into the banking system at a time of cyclical strength."

Ms. George also said she is unsure what to make of a bond market development many are interpreting as a concerning sign for the future of the economy. Short and long-dated bond yields are growing much closer and might move from a normally positive relationship to a negative one. These so-called yield curve inversions in the past have been strongly associated with recessions.

"While the yield curve has not yet inverted, it is relatively flat by historical standards, raising the possibility that further increases in policy rates could move them above longer-term rates," Ms. George said. "It's not clear how concerned we should be about this possibility."

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

July 17, 2018 20:30 ET (00:30 GMT)