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This will require careful calibration. It's no secret that advanced economies are growing slowly. The International Monetary Fund thinks 2011 output will reach just 2.2 percent in rich countries while China romps ahead at 9.6 percent.

Figures this week are expected to show China's import growth outpaced that of exports in November, although the total volume of goods flowing out still easily dwarfs those coming in.

The trade balance probably widened yet again last month, according to economists polled by Reuters, providing more ammunition for critics who say China holds down its yuan currency to gain a trade advantage.

(China trade, inflation graphic: r.reuters.com/syw48q)

For the global economy, the question is what happens to China's domestic demand once policymakers begin twisting harder on the credit screws to try to tame inflation.

Chinese inflation data won't come for another week, but economists think the consumer price index edged closer to a 5.0 percent year-over-year growth rate in November, up from an already uncomfortable high 4.4 percent in October.

The Communist Party's top leaders announced on Friday they would switch to a "prudent" monetary policy while maintaining "proactive" fiscal policy, a signal that they are well aware of the need to ensure a gentle slowdown.

Donald Straszheim, head of China research at ISI Group in Los Angeles, said Beijing was clearly on a path to raise interest rates, but how fast and how far remains to be seen.

The term prudent "means whatever the appropriate officials want it to mean," Straszheim said, adding that China may aim to contract the money supply and restrict new lending in order to cool the economy.

China has already taken steps to curb lending, raising banks' required reserve ratio twice in the past month.

Xianfang Ren, an economist with IHS Global Insight in Beijing, said the government's tightening message was "clear and strong" as inflation spreads beyond financial markets and food and into a broader range of goods.

"Nonetheless, the government exit from the stimulus cycle is expected to be quite calculated and smooth as the policymakers try to avoid a hard landing," he said.

DIVERGING, NOT DECOUPLING

The rest of the world would like to see China avoid a hard landing, too.

As the Federal Reserve tries to counter suspicion of its latest $600 billion stimulus plan, it is making a concerted, if awkward, effort to raise the chairman's profile and harmonize the often-dissonant message from within the central bank.

One big fear Bernanke must counter stems from the Fed's bloated balance sheet: with some $2.3 trillion in reserves sloshing around the U.S. banking system, some economists and many Republican politicians say inflation is bound to get out of hand.

Another element of the Fed's image problem is the lingering stigma of Wall Street bailouts during the financial crisis, brought to light again last week by data revealing just how heavily major investment banks, including foreign ones, leaned on the Fed for survival.

Barely two years later, the same banks have returned to making handsome profits and rewarding executives with gold-plated pay packages, even as the U.S. unemployment rate remains near 10 percent.

An appearance by Bernanke on CBS television's "60 Minutes" program, to air on Sunday at 7 p.m. EST, is the Fed's latest push to defend its controversial drive to lower borrowing costs from political encroachment and intense criticism from overseas.

In a first for a Fed chairman, Bernanke published an opinion piece in The Washington Post just hours after the bank launched a new round of monetary easing on November 3. He has also appeared at two unscripted question-and-answer sessions on university campuses in recent weeks.

It will not be easy to fight the view that any Fed action, even a broad easing of monetary conditions, amounts to a bailout of the financial industry. About half of Americans are less confident in their central bank today than five years ago, according to a Thomson Reuters/University of Michigan survey published in November.

U.S. politicians, normally circumspect on matters related to interest rate policy, have not been shy about critiquing the Fed's bond purchases and the inflation risk they pose. Many Republicans want to rewrite the Fed's mandate to focus solely on inflation, dropping its aim to foster full employment.

"Once monetary policy becomes a political issue you have to try to appeal to a broader audience than Wall Street investors," said Maury Harris, chief U.S. economist at UBS.

"What's happened is that people treat it like it's another TARP," he added, referring to the Treasury Department's rescue fund for big banks. "It's viewed as, 'if the Fed is printing money they must be bailing out somebody.'"

U.S. economic growth, at just 2 percent in the third quarter, is still too sluggish to put a dent in the unemployment rate, which in November rose to 9.8 percent. Inflation remains low, giving officials comfort that they can ease monetary conditions without causing a surge in prices.

SPEAKING MORE TO SAY LESS

Communications have always been a tricky game for the Fed. Too little can leave financial markets in the dark, boosting uncertainty and volatility. Alan Greenspan, Bernanke's predecessor, tended more toward secrecy and became famous for his cryptic and sometimes unintelligible comments.

Bernanke's experience in academia makes the South Carolina native prone to a less hierarchical, more collegiate approach to policymaking than Greenspan. He has also long been an advocate for greater transparency.

Wall Street showed its ability to hold onto gains, or quickly recover from losses last week despite Europe's debt woes, suggesting that investors are confident of a sustained rally.

"When things don't fall apart on bad news, you know that the market is no longer vulnerable. The overall sentiment is pretty solid," said Randy Frederick, director of trading and derivatives at Schwab Center for Financial Research in Austin, Texas.

The outstanding put-to-call ratio on index options, heavily focused on the S&P 500 benchmark, dropped from 1.32 for the shortened Thanksgiving holiday week to 1.29, showing bullish signs for the week ahead.

The ratio, which is always greater than 1, is the primary hedging vehicle for institutional investors. The ratio rises with a market rally as the possibility of a pullback also increases.

"The ability (to not fall apart) is helping investors remain upbeat on short-term prospects for stocks. We may not see this continue until the end of January next year, but the month of December certainly looks encouraging."

The CBOE Volatility Index or VIX .VIX, Wall Street's so-called fear gauge, fell on Friday despite a decline in stocks earlier in the day as traders saw fewer reasons to buy protection.

The index, which usually moves inverse to the S&P 500 benchmark, strayed from the relationship and closed at its lowest since April.

The iPath S&P 500 VIX Short Term Futures exchange-traded note (BARC.L) (VXX.P) also notched a new year low of $41.11 on Friday. The ETN, which offers directional volatility exposure, is based off of the front two-month futures on the VIX.

"There is definitely a trend in the VXX to try to get short in the ETN," said Dan Deming, a VIX options trader at Stutland Equities.

S&P 500 UP ABOUT 10 PCT FOR YEAR

Fears that Europe's debt crisis could spiral out of control have pushed stocks off two-year highs hit earlier this month. Last week, the S&P 500 was down 3 percent from November 5.

But the index recovered to the early November levels last week as fears were countered by a spate of healthy economic data and an upbeat outlook on consumer spending during the holiday shopping season.

"Europe is kind of its own play now," Jeff Roach, chief economist at Horizon Investments in Charlotte, North Carolina, said, adding that investors are starting to brush off the longer-term macro issues.

On Friday, stocks closed out their best week in a month with the Dow Jones industrial average .DJI up 2.6 percent, the Standard & Poor's 500 .SPX up 3 percent and the Nasdaq Composite Index .IXIC up 2.2 percent, after shrugging off tepid jobs numbers for November.

Government debt purchases by the European Central Bank calmed markets toward the end of last week, pushing down the borrowing costs of vulnerable countries on the euro zone's southern periphery such as Portugal, Spain and Italy.

But ECB President Jean-Claude Trichet has made clear that politicians cannot rely solely on the Frankfurt-based central bank to resolve their crippling debt crisis and urged them to take decisive new steps to win back the confidence of investors.

He has suggested one solution could be to boost the size of the 750 billion euro ($1,006 billion) rescue facility the EU and IMF set up in May after bailing out Greece, an idea backed by Belgian Finance Minister Didier Reynders on Saturday.

Speaking at a conference in Brussels, Reynders said it made no sense to wait to increase the amount of available rescue funds until the bloc has set up a new permanent rescue mechanism that is scheduled to take effect in 2013.

"If we decide (to increase it) in the next weeks or months, why not apply it immediately to the current facility," he said.

Europe's economic powerhouse Germany has said it sees no reason to increase the facility, but some of its euro zone partners believe such a move could alleviate market concerns about the bloc's ability to cope with further contagion.

Current rescue funds would be stretched if the bloc were forced to bail out Portugal and Spain, after agreeing to provide Ireland with 85 billion euros in emergency aid last week.

SPANISH BACKLASH

In a bid to ease market concerns about Spain's finances, the government of Prime Minister Jose Luis Rodriguez Zapatero announced a series of new measures last week, saying it would bring forward pension reforms, raise tobacco taxes and cut windpower subsidies.

But its plans to sell off 49 percent of state-owned airports authority AENA provoked a wildcat strike by air traffic controllers that paralyzed airports on Friday and Saturday, forcing the government to declare a state of emergency.

More than 90 percent of the controllers had returned to work by Saturday evening, but the disruption underscored the difficult balancing act euro zone governments face as they seek to appease markets without provoking a public backlash that could further dent investor confidence.

"If they don't manage to get this situation under control it could be a serious blow for the government both at home and internationally," said Angel Laborda, an economist at Spanish consultancy FUNCAS.

A poll published in Spanish newspaper El Pais on Sunday showed support for Zapatero's ruling Socialists sinking to its lowest level in the country's modern democratic era.

In Greece, which is struggling to meet tough deficit reduction targets agreed in exchange for a 110 billion euro EU/IMF rescue, the central bank governor urged the government to step up the pace of reform, saying the country should be aiming to beat the goals set for it.