Should the Fed follow Hoenig’s wished for script, it would go a long way to restoring some balance in investor appetite for risky assets and give the US dollar a much needed jolt of credibility in the foreign exchange markets. It seems right now that speculators are feeling pretty confident that they will not be challenged by the Fed’s willingness to change course and raise interest rates anytime soon.

It should be clarified that in China’s case, today’s move amounts to not even “scratching the surface” when it comes to dealing with the amount of speculation built up in the Chinese economy. The government is trying to walk a fine line in trying to contain the excesses in the Chinese economy (i.e. too much factory capacity, real estate prices out of control in some cases and a factory construction pace that is leaving supply far outstripping demand in many sectors).

In the US, a strong dollar would catch a lot of investors off stride as many have gone into this year with the preconceived notion that the dollar's slide will continue. Perhaps it will – but if the Fed shows its resolve, all bets are off.

At this point in time, two competing camps are tugging at the Fed. One camp is arguing that there is no need for higher interest rates for quite some time as the considerable amount of unemployed Americans, slack in manufacturing output capacity and a fragile banking system will keep inflation in check. The other camp consists of inflation hawks who are saying that the rise in gold prices and commodities is due in part to a rising lack of confidence in the US dollar.

It will be interesting to see which side wins out but the implications for investors could not be more significant.