That seems to be the view these days of financial markets towards Ben Bernanke, the Federal Reserve Chairman.

While the latest US economic data show manufacturing in a slump, the housing market continuing its downward spiral and consumers losing confidence in their financial future faster than President Bush is losing influential friends, Mr Bernanke stands calm and aloof. As the bond market signals recessionary risks higher than they have been in the past four years, and as the dollar tumbles in response, the Fed Chairman insists that the bigger threat to the US economic outlook remains an inflationary breakout.

Is this a piece of remarkable contrarian insight from a genius of the economics profession? Or the befuddled gropings of a man who has seriously lost the plot? Last week, right in the midst of a slew of grim economic numbers, Mr Bernanke was at his most unflappable. In a speech to the Italian-American Association in New York, the phlegmatic Mr Bernanke expressed confidence that the economy would continue to grow at or just below its long-term trend rate (of about 3 per cent per year). But he worried openly about the risk that accelerating labour costs could pose for inflation and said that the Fed would be on the alert to squash inflationary pressures.

Fixed-income markets, which usually receive the Fed Chairman’s remarks in the form of tablets of stone, simply decided to ignore them, taking their cue instead from the solid reality of economic reports. Last Friday the Institute of Supply Management’s purchasing managers’ index said that US manufacturing actually contracted in November for the first time in three years. The bond market reacted violently, sending the yield on the ten-year treasury bond to a smidgin above 4.4 per cent.

Meanwhile, the Fed’s own overnight interest rate, the fed funds rate, stands at 5.25 per cent. This inverted yield curve, where long-term rates actually sit below short-term rates, often indicates imminent recession. The inversion this time has now held for four months, suggesting to many that the recession probability is high.

In the past few years the persistence of relatively low long-term rates has been attributed to the global savings glut, as money sloshes around the world looking for investment opportunities, but now the mood in the bond market seems to suggest long rates are low because of the real fear of an economic slump. Traders seem to think the economy is going to slow markedly in the first half of 2007, forcing the Fed to cut short-term rates.

Bearish economists see strong parallels between the current conditions and those of exactly six years ago. In November 2000, as the equity market bubble was bursting and growth was slowing, the Fed was still insisting that the economy was dangerously frothy. At the November 15, 2000, meeting of its policy-setting open market committee, the Fed said in its characteristically orotund language: “The risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.”

That was code for saying that the next move in interest rates was more likely to be up than down, much the same message as the Fed gave at its last committee meeting this year in October.

Yet less than seven weeks later, in an emergency conference call on January 3, 2001, the day after an awful number from the purchasing managers’ index, the Fed called an emergency committee meeting and cut rates — by a hefty half a percentage point. It then proceeded to cut rates a further five times in the next six months. That wasn’t enough to avert a recession in 2001, though it certainly cushioned the blow.

Is Mr Bernanke going to be forced to emulate his predecessor six years ago and swallow his current confidence that all is well? Fed officials remain a little puzzled that the bond market is so convinced that a sharp slowdown is in the offing. They acknowledge that some sectors of the US economy are suffering — notably housing and cars — but say that there is as yet only limited evidence of a broader slowdown. The housing crunch, though real, at least in terms of measured prices, has not been as devastating for the consumer as some feared it would be. They note that its effects have probably been offset both by the 25 per cent decline in energy prices in the past six months and by the bond market’s own activity — lower long-term rates have cut mortgage costs sharply for homeowners.

Furthermore, policymakers insist, inflation has not disappeared. The Fed’s favoured measure of price increases, the deflator for personal consumption expenditures, dropped in the three months to the end of September, but at 2.4 per cent annually it is still some way above the central bank’s comfort zone. For Mr Bernanke, a fan of explicit inflation targets, this fact still demands rapt attention.

And yet, for all the Chairman’s taste for fixed targets, the Fed is nothing if not flexible. On Friday, just days after the Chairman’s speech, there was the faintest whiff of a change in mood when Donald Kohn, the veteran Fed man who is now the vice-chairman, spoke to an international monetary conference at the central bank’s headquarters. The subject of Mr Kohn’s remarks was, serendipitously, uncertainty in monetary policy. His message, delivered in anodyne fashion, was a humble one: in financial markets, as in life, we should always be ready to expect the unexpected. A lesson that will be learnt the hard way in the naxt few months — either by the bond market or by the Fed.

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