Over the last few months, I’ve noted repeatedly that THE key issue for the financial markets is the ongoing tension building between the Fed’s pro-inflation policy and China’s anti-inflation policy.
That tension just kicked it up a notch.
Over the weekend, China hiked interest rates 0.25%. This was the second interest rate hike in three months (the first was on October 19, 2010). And it sends a clear message that China is taking action to cool its monetary system after consumer prices rose 5.1% in November.
China’s not the only one. Both Russia and Brazil have recently entered into the “anti-inflation fray” as the below stories attest:
Russia's central bank raised interest rates on its deposit operations on Friday to contain surging inflation, its first step away from the loose policy implemented after the financial crisis hammered the Russian economy.
The bank lifted its deposit rates by 25 basis points but left the cost of lending operations -- including the benchmark refinancing rate -- unchanged, saying a narrower corridor between the cost of various instruments would increase the effectiveness of its interest rate policy.
Brazil's central bank caught markets somewhat by surprise Wednesday with an unusually clear commitment to raise interest rates soon, as the outlook for inflation has become "far less favorable" than it had previously thought.
Brazil joins other emerging countries, including China, that are taking steps to cool their economies, for fear of overheating. Earlier this month, China said it will shift to a "prudent" monetary policy next year, amid growing concern in Beijing about inflation and excessive liquidity fueled partly by loose monetary policies in other countries.
In plain terms, our esteemed Fed Chairman Ben Bernanke is about to find his policies running face first into a BRIC wall. He’s been exporting inflation abroad to the emerging markets, all the while claiming it doesn’t exist. With growing civil unrest due to soaring food and energy prices, the emerging markets are now fighting back.
On that note, China and Russia have already cut their US Treasury holdings by 3% and 9%, respectively, year over year.
These may not seem like a HUGE drop, but when you consider that both countries are aggressively loading up on Gold and other natural resources at the same time, we may be at the beginning of a potential seismic shift away from US debt for foreign central banks.