The ping-pong match between the ECB and Fed to see who can make the worst policy decisions the fastest, switched back in favor of the Fed today with Bernanke’s pledge to pour on the monetary stimulus if needed.

Please consider Fed Ready With Stimulus If Needed

Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling.

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke said in prepared testimony before the House Financial Services Committee in Washington today. “The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate.”

Bernanke acknowledged there are “uncertainties” in both directions — about the strength of the economic recovery and the prospects for inflation — over the medium term.

The Fed chief repeated his belief that inflation won’t be a problem for the economy because gasoline and food prices, which had surged earlier this year, are now moderating.

Dollar Tanks on Bernanke’s Comments

Bloomberg reports Dollar Weakens as Bernanke Says the Fed Will Respond If Stimulus Is Needed

The greenback fell the most in six months versus the euro as Bernanke said central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. The Australian and New Zealand dollars led earlier gains against the currency after China’s economic growth exceeded analysts’ estimates. The euro advanced as Italian and Spanish bonds rose for a second day.

Gold Hits Record High

In the wake of Bernanke’s statements Gold Advances to Record High

Gold futures surged to a record $1,588.90 an ounce as the dollar’s slump and the European debt crisis spurred demand for precious metals as alternative assets. Silver surged the most since March 2009.

The greenback fell as much as much as 1 percent against a six-currency basket after Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank is prepared to provide additional stimulus to bolster the economy. Yesterday, Ireland became the third nation in the European Union to have its credit rating cut below investment grade.

Gold futures for August delivery climbed $24, or 1.5 percent, to $1,586.30 at 12:32 p.m. on the Comex in New York, heading for the seventh straight gain. The previous intraday record of $1,577.40 was on May 2. The spot price of the metal priced in euros and pounds also rose to all-time highs today.

Since Dec. 1, 2008, gold has doubled as the Fed kept interest rates at a record low and governments spent trillions of dollars to spur global growth. The Fed’s second round of so- called quantitative easing, known as QE2 among investors, ended in June.

Yesterday, tonnage holdings in exchange-traded products backed by gold jumped 1 percent, the most in a year.

Most think it’s a given that the stock market will soar when Bernanke starts QE3. I don’t. Just because it did last time does not mean it will every time.

One of these times Bernanke is going to react in a way that spooks the bond market in a major way, and the market will slap him silly just as happened to Jean-Claude Trichet and the ECB over Trichet’s “no default” insistence.

Mike “Mish” Shedlock
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