Economic data this week were slim and predictable: Consumer confidence fell again, and rebate checks plumped May spending and income, but gave no durable, corner-turning boost. The “personal consumption expenditure deflator” in the spending/income report confirmed the remarkable (and painful) “core” inflation performance, only a 0.1 percent gain: Prices for everything except food and energy are on or over the edge of deflation.

This week was all Fed and markets. Analysts’ responses to the Fed’s meeting have described two different economies and mutually exclusive policy responses: one, the mainstream view that the economy is too weak for the Fed to raise its rate; the second that inflation-fighting and dollar-defense are paramount.

The object of the dispute is the Fed’s set-point for the overnight cost of money, at 2 percent deemed too low by the insurgents. They claim that if the Fed began to raise it, the dollar would strengthen, dollar-denominated oil prices would fall, and so would inflation.

Possibly as late as the 1980s, this claim might have had merit; today’s world is much more interdependent and resistant to unilateral action of this and other kinds. To fight inflation, so long as you’re not printing money (we’re not), you must slow your economy. I get from the policy insurgents either a belief in miracle cure without economic pain, or deception about just how slow they want the economy to get. In dollar defense, none of these people have a plan for the damage done by a $2 billion dollar per day excess of imports over exports — Warren Buffett’s well-made point.

The Fed funds rate is relative to many things: 2 percent today versus 5.25 percent last August, and the European Central Bank’s 4 percent, must be measured in relation to overall credit conditions, which are extremely — possibly ruinously — tight. A low funds rate is the only way the Fed can help the banking system to rebuild capital: earnings from wide short-long spreads.

My only quarrel with the Fed’s statement is its claim that “Downside risks to growth … have diminished somewhat.” Mr. Buffet on Wednesday: “I watch kind of a lot of real-time data, and the economy is weakening — if anything, weakness accelerating.” Amex said that its June customer credit indicators had deteriorated “beyond our expectations.” New purchase mortgage applications are two weeks into an 8 percent per week compound decline. OFHEO’s balanced, broad, and nonhysterical measure of home prices finally began to decline in April.

Energy, commodity and food prices are out of control, but asset prices are deflating, houses and now stocks; the Dow is down 14 percent for ’08, 19 percent since October. In evidence of terminal capital exhaustion, the DJ Wilshire Bank Index has lost half of its value in just 16 months. Chrysler denied plans to file for bankruptcy. This week.