BEN BERNANKE thinks the economy is strong and that inflation remains a danger. The equities market believes the Federal Reserve Board chairman, so share prices hover around record levels. The bond market doesn't, and expects that he will soon have to recognize the economy's underlying weakness by lowering interest rates--not this week when the monetary policy committee meets, but almost certainly by the spring. The currency market is siding with the bond market, its players guessing that the Fed will indeed have to lower interest rates, making the dollar less attractive, relative to the euro and sterling. So the dollar is weak, which should add to inflationary pressures by making imported goods more expensive and giving domestic manufacturers room to raise prices, thereby forcing Bernanke to raise interest rates even if the economy is slowing. We used to call that stagflation.

Confused? With good reason. So is the Fed and so are the markets. But be kind--the economic situation is characterized by cross currents that are difficult for even the most experienced economist to navigate.

Start with housing. Everyone agrees that the bubble, if it was a bubble, has burst. Or, to use former Fed Chairman Alan Greenspan's formulation, that the froth has come off the brew of speculation. If you prefer Bernanke's turn-of-phrase, we are witnessing a "correction."

A slowdown by any other name means the same thing. Sales are down; inventories of unsold homes are up by 50 percent over the average in the past decade even though construction of single-family homes

So far, so agreed. But the impact of this development is unclear. Some think the slowdown will frighten consumers into reining in spending, especially as they can no longer repeatedly borrow against the rising value of their homes. Others argue that rising share prices are repairing consumers' balance sheets, that there are no signs that the service-sector boom will taper off, and that the strong jobs market and growth in real wages will buoy spending, especially as Christmas cheer begins to permeate consumer attitudes.

The difference results in widely varying forecasts: From a 2007 recession by pessimists who think the housing sector's problems will wash over the general economy; to growth in the 2 percent range by those who expect a ripple from housing, rather than a wave; to 3 percent growth by what we might call the economy's cheerleaders. The latter point to the fact that slowing residential construction is being accompanied by a mini-boom in the construction of offices and factories: non-residential construction in the last quarter jumped 27 percent over year-earlier levels, the greatest gain in over a quarter-century.

The housing sector's impact on the economy is not the only unknown. As the American economy slows, many economists are relaxed because they believe Europe will take up the slack. Consumers in Germany are more optimistic than they have been for five years, and the European Central Bank is so certain that the eurozone is headed for decent growth that it is planning to continue raising interest rates, as it did last week, lest inflation get out of hand. Inbound investment is growing in response to high returns on equity, and labor markets are improving.