Federal Reserve vice-chairman Donald Kohn has warned investors not to underestimate the central bank’s inflation concerns. He has even challenged the wagers of some traders that certificate of deposit interest rates may be cut.

Mr. Kohn delivered a speech in a gathering of economists and money managers in New York on Oct 4. He said that he is more worried about persistent inflation than a slowdown in growth. He added that that the economy is likely to avoid recession and that a pickup in prices would warrant borrowing costs. He said, “Further upward movements in inflation would be very adverse to the economy and would, I think, require policy actions.”

The views expressed by Mr Kohn are odds with speculation that a housing slump will prompt a cut by early next year. According to Fed chairman, Ben S Bernanke, the US property market is in a “substantial correction” that will lop about a percentage point off economic growth in the second half and restrict expansion next year.

The effect of Mr Kohn’ s speech was seen as US 10-year Treasury notes fell in Asian trading on Oct 5. However, stocks in Asia rose after Mr Bernanke’s remarks. Mr Bernanke has also mentioned persistent inflation as a risk, though some traders interpret the Fed chairman’s comments as consistent with a possible rate cut and pushed stocks higher.

In his speech, Mr Kohn said, ”The risks to my outlook for economic activity may be skewed to the downside, while those to my forecast of gradually declining inflation are tilted to the upside. In the current circumstances, the upside risks to inflation are of greater concern.” According to him, the current overnight lending rate level of 5.25% has the best chance of promoting a so-called soft landing. He expects that the economy will continue to slow before picking up and falling oil prices would allow consumers to spend more.