Its the first day of school today, such an exciting time. And what are we greeted with? A prime example of the power of globalization to shape international markets–even the vaunted US economy and Federal Reserve Board.

Today, the NYT reports on the Fed’s retreat/conference out in Wyoming (casual, because Fed Chair Ben Bernanke doesn’t wear a tie).

Econ 101 in a nutshell: the Fed sets interest rates in an attempt to manage inflation and domestic economic growth. Low rates mean money (loans, capital, financing) is cheap and available, so the economy grows but then inflation appears. Higher rates make money expensive and inflation slows, but so does growth. The goal is to moderate the boom / bust cycle of the market.

Anyway…. as the Times reports:

As the Federal Reserve fiercely debates how to reduce inflation within the United States, economists are warning that trends outside the country may soon make the Fed’s job much harder.

In recent years, global integration has made things easier for the Fed in two ways. An explosion in low-cost exports from China and other countries helped keep prices of many products low even as Americans spent heavily and loaded up on debt.

At the same time, China and other relatively poor nations reversed the normal patterns of global investment by becoming net lenders to the United States and Europe. Analysts estimate that this “uphill’’ flow of money from poor nations to rich ones may have reduced long-term interest rates in the United States by 1.5 percentage points in recent years — a big difference when home mortgage rates are about 6 percent.

In other words, vast / huge / gianormous capital flows from China have been keeping my and your and your parents and everyone else’s mortgage payments low. This is good because it frees up money for other things in the economy.

Normally, the Fed is in control of all this, by setting short term interest rates and printing more money as needed, guiding interest rates. Not so much any more:

But as Fed officials held their annual retreat this weekend here in the Grand Tetons, a growing number of economists warned that those benign international trends could abate or even reverse.

For one thing, they said, China’s explosive rise as a low-cost manufacturer does not mean that prices will fall year after year. Indeed, China’s voracious appetite for oil and raw materials has aggravated inflation by driving up global prices for oil and many commodities.

Beyond that, new research presented this weekend suggested that the United States could not count on a continuation of cheap money from poor countries. Those flows could stop as soon as countries find ways to spend their excess savings at home.

“Medium- and long-term interest rates are set outside of the country,’’ said Kenneth S. Rogoff, a professor of economics at Harvard University and a former director of research at the International Monetary Fund. “It’s very important to think about what to do if the winds of globalization change.’’

Like, maybe:

“What happens if foreign investors decide they don’t want to accumulate American assets any more?” asked Martin S. Feldstein, economics professor at Harvard and president of the National Bureau of Economic Research.

Just to take an example:

One example is Chile, the most prosperous country in Latin America. Thanks to soaring copper prices in recent years, Chile has paid off its government debt and is running a budget surplus equal to about 7 percent of its gross domestic product. Chilean leaders are putting the surplus into a long-term stability fund, part of which is invested in foreign securities, that will be used to maintain full government operations if copper prices plummet.

Mr. Rajan said many countries might not have a way to channel their excess savings because their banking systems were too underdeveloped. If so, the savings rates of those countries may decline as people become more accustomed to rising incomes and as banks find ways to rechannel savings into consumer and business loans.

Even though capital is flowing uphill to rich countries like the United States right now, Mr. Rajan said, “it doesn’t mean these flows are optimal, safe or permanent.”

In otherwords, international capital markets, not the Federal Reserve, are starting to set US interest rates. This hits you and me right in the pocketbook– mortgage, car loans, student loans, credit card rates. All could be heading higher, and unlike in days gone by, there might be nothing the Fed, or any other US actors, can do about it.

Globalization, baby, Globalization.

Filed as: Globalization, Fed