However, U.S. monetary policy does not just affect the American economy. Indeed, the Fed's decisions have far-reaching implications for the entire international economic system. So, what are the global consequences of a "cheap dollar"?

In recent weeks, a number of top economic policymakers from the world's largest economies -- including China, Japan and Germany -- have raised concerns about one potential consequence of the Fed's decision to keep U.S. rates low: the possibility that it will fuel speculative bubbles around the world.

Here's how it works. When a currency can essentially be borrowed for free, it becomes very enticing for investors to borrow in that currency and then use the borrowed funds to buy up foreign assets that they expect will bring higher returns. These assets may take the form of foreign currency bonds yielding higher rates of interest (called "currency carry trade"), or they may be tangible assets, like real estate.

This, in turn, can lead to a large and rapid influx of capital in emerging markets around the world, as investors are attracted by higher interest rates and other investment opportunities. These types of capital inflows can result in rapid appreciations of a country's currency as well as other assets. Of course, it is not just the inflow of capital and the threat of "overheating" that is alarming. Recent history has shown that such capital inflows are usually followed by equally large and rapid outflows. It isn't the boom, but rather the subsequent reverse-boom, characterized by capital flight, that countries fear the most.

It's no surprise, then, that around the world countries are exhibiting a renewed interest in capital controls. For instance, Brazil recently put in place a 2 percent tax on foreign investment in bonds and equities that it hopes will slow the migration of short-term, speculative funds its way. A number of Asian countries may soon follow Brazil's lead, as signs of an overheating East Asian real estate market, fueled by foreign investors, are already apparent.

Another global consequence of a cheap dollar is that countries holding significant U.S. assets run the risk of losing money on these investments due to the potential for inflation. And all other things being equal, the longer the Fed keeps rates low, the greater the potential for inflation becomes. If the value of the greenback relative to the yuan, the yen, or other currencies falls by a significant percentage in a short period of time, countries holding large amounts of dollar denominated assets would quickly incur significant losses. This fear was apparent when a former top Chinese official remarked earlier this year that the U.S. should "link the earnings of government bonds with inflation to protect the interests of international investors."

The threat of inflation is already driving countries around the world to diversify their foreign exchange holdings to guard against such exchange risk, yet another consequence of the Fed's continued commitment to low rates. Recently, India jumped at the opportunity to buy up 200 tons of gold from the IMF at a price of $6.7 billion and is reportedly considering buying more. Russia moved last week to invest some of its forex reserves in "loonies" (Canadian dollars) as a hedge against the U.S. greenback. And while the overall demand for U.S. Treasury Bonds remains strong, the largest consumers of American debt -- China and India -- have been moving, since the summer, to reduce their U.S. debt holdings.

The Fed is certainly not unaware of these concerns. Indeed, recently released minutes (.pdf) from the Federal Open Market Committee's (FOMC) Nov. 3-4 meetings reveal that these issues were discussed. FOMC members acknowledged possible dangers of maintaining very low short-term interest rates for an extended period, including "excessive risk-taking in financing markets or an unanchoring of inflation expectations." And just this week, Charles Plosser -- president of the Federal Reserve Bank of Philadelphia -- warned that if the Fed waits too long to raise rates, "the inflation rate is likely to rise to levels that most would consider unacceptable."

Given the unpopularity and far-reaching implications of current U.S. monetary policy, it should come as no surprise that President Barack Obama's comments about Chinese monetary policy during his mid-November trip to the Middle Kingdom did not go over well in Beijing. On his visit, Obama called on the Chinese government, which manages the value of its currency, to allow the yuan to appreciate. Such a move would arguably bring more balance to the world economy by increasing Chinese consumption and decreasing the competitiveness of Chinese goods in overseas markets. China responded by saying American expectations are "not fair" and reiterated its commitment to providing a "stable and predictable environment in terms of macro-economic and exchange rate policies." Such statements, coupled with an overall lack of American leverage vis-à-vis China, suggest that yuan appreciation, when it happens, will not be a decision significantly influenced by outsiders.

What are the chances that the Fed will change its policy stance based on these international concerns? Slim. Its primary focus remains the domestic economic situation. With unemployment projections predicting the U.S. jobless rate will remain near 10 percent a year from now, the Fed is expected to keep short-term interest rates close to zero until 2011.

That means that none of these global concerns will be disappearing anytime soon.

**Daniel McDowell is a Ph.D. candidate in International Relations at the University of Virginia, specializing in International Political Economy.