The risk of a collision between the Federal Reserve and the markets grew on Friday after Fed governor Randall Kroszner made it clear that the US central bank was not planning to cut interest rates at its next policy meeting, but was largely ignored by investors.

Kroszner said: "The downside risks to growth now appear to be roughly balanced by the upside risks to inflation" and added that data and information since the Fed's October meeting "have not changed my thinking in this regard".

However, the federal funds futures market barely moved, and continued to price in a 70-80 per cent probability that the Fed would cut in December, while the yield on two-year Treasuries declined. The standoff came as Hank Paulson, US Treasury secretary, kept up his increasingly vocal advocacy of the "strong dollar policy" in an apparent bid to reassure global investors that the US was not indifferent to the fate of its currency.

The Treasury Secretary told reporters in South Africa that he "very much" supported a strong dollar and believed that the "fundamental, long-term strengths" of the US economy "will be reflected in currency markets".

The dollar, which has shown some tentative signs of stabilisation this week, edged up against the yen in early trading yesterday but fell against the euro and sterling.

Fed's Kroszner said that in the near term "the economy will probably go through a rough patch" with further falls in house prices, home construction and subdued consumer spending. He did not rule out a future cut in rates. , but he said explained that the additional weakness was already anticipated when the Fed cut rates and moved to a balanced assessment of risks in October.

He said: "Looking further ahead, the current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer run sustainable rate."

Formally, Kroszner speaks only for himself. However, his views are widely shared by other top Fed officials, some of whom have made similar remarks in recent days with equally little effect on the market.