Dollar bulls and Goldilocksters are pretty excited this morning after Federal Reserve Chairman Ben Bernanke mentioned the greenback for the first time. "We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations, and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations," he said.

This appears to be the beginning of "tough" and "scary" talk from the Fed, although not so tough or scary as to even hint at the possibility of a rate hike. In fact, by saying, "Until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside," Bernanke is leaving the door open to easing again.

With respect to oil, Bernanke seems to focus even more on its drag on growth than on its inflationary implications, noting, "Recent increases in oil prices pose additional downside risks to growth," instead of saying that it poses additional upside risks to inflation.

Let's take a trip down memory lane for a sense of what it actually means when the Fed closely "monitors" and remains "attentive" to any number of issues:

It will continue to monitor inflation developments carefully.
This was the phrase used in the Federal Open Market Committee's (FOMC) December statement, where it eased 25 basis points and would follow with more easing.

It will be necessary to continue to monitor inflation developments carefully.
This was the phrase used in FOMC's January statement, where it eased 75 basis points and would quickly follow with even more easing.

It will be necessary to continue to monitor inflation developments carefully (again).
This was the phrase used just one week later, during the FOMC's second January statement, where it eased by another 50 basis points and followed up with even more easing.

As you can see, all that monitoring and attentiveness is effectively meaningless. With the economy -- and more importantly the banking system -- still crippled, the Fed's powerless to do anything other than talk tough as we slowly stagflate. If the Fed wants to keep the banking system intact, it has no choice other than to inflate, and that's exactly what it (has done and) will continue to do regardless of what it says to the contrary. The result: More stagflation.

The dollar may bounce some since it's already in the middle of a bear market rally, but gold is unlikely to be fooled for long after having bottomed in early May. Even today, the dollar index is within 0.3% of its May peak, while gold remains some $35, or 4%, above its corresponding $850 low in May. 

Nor are Gold shares too terrified of this tough talk. Many are already up on the day, as is the Amex Gold Miner's Index (GDM). And, as we speak, the GDX/GLD (gold miners versus gold shares) ratio is actually up a percent and challenging its downtrend.


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