Fed official: 'We will do what is needed'

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NEW YORK (CNNMoney.com) -- The Federal Reserve is prepared to handle the growing concerns of rising inflation and an economic slump, according to the body's vice chairman.

In a speech Tuesday at the University of North Carolina, Vice Chairman Donald L. Kohn said the Fed has historically been able to correct an economic downturn while still keeping rising prices in check.

"Monetary policy has proven...very effective in recent decades in damping inflation when needed and in stimulating demand and activity when that has been appropriate," Kohn said in the prepared text of his remarks.

But as the Fed has lowered its main lending rate to 3% from 5.25% last September to stimulate the economy, some economists worry that the rate cuts have weakened the value of the dollar, and that inflation will spiral out of control.

Perhaps signaling a future rate cut, however, Kohn said he believes the Federal Reserve is equipped to deal with both battles.

"Our job at the Federal Reserve is to put in place those policies that will promote both price stability and growth over time," Kohn said. "We have the tools. As Chairman (Ben) Bernanke often emphasizes: We will do what is needed".

Kohn sits on the central bank's rate-setting Federal Open Market Committee.