Inflation has reached decades-long records due to the significant increase in spending during 2021, world price hikes, and problems in global supply chains. The Central Bank of Chile started its monetary policy response early in 2021 and is taking every measure necessary to bring down inflation. Local authorities have continued to work towards the consolidation of a financial stability and macroprudential framework. On financial stability policy, the mandate of the BCCh includes ensuring the normal functioning of internal and external payments systems, including the role of lender of last resort to the banking system. This gives the BCCh a broad interest in the stability of the overall financial system. Through its semiannual Financial Stability Report, BCCh identifies, monitors and reports on risks and vulnerabilities within the financial system, from a macroprudential perspective. The BCCh took the very first steps into the financial stability territory back in the early 2000s. The first Financial Stability Review of the BCCh was released in 2004, a report that contains a systemic risk assessment and analysis that provides valuable information to all participants in the local financial market, including regulators and other authorities. Thus, during the last two decades, the BCCh has consolidated its financial stability role. In turn, the CMF mandate is to safeguard the proper functioning, development and stability of the financial market, supervising banks, their subsidiaries, the 3 large saving and credit cooperatives, credit card issuers, insurance companies, securities issuers; fund managers; brokers; and financial market infrastructures. Strong coordination is required among financial authorities to preserve financial stability.

If a small rise in short-term rates were to lead to an abrupt increase in term premia and bond yields, resulting in a significant tightening in financial market conditions, then the Federal Reserve would likely move more slowly – all else equal. As an example, consider the experience of the 1994–95 tightening cycle. Bond yields rose sharply and the Federal Reserve tightened less than what was ultimately priced in by market participants. Conversely, if term premia and bond yields were to remain low and the economic outlook suggested that financial conditions needed to be tighter and a rise in short-term rates did not generate this outcome, then the FOMC would likely need to raise short-term rates further than anticipated. The 2004–07 tightening cycle might be a good example of this. The FOMC ultimately pushed the federal funds rate up to a peak of 5.25 percent, in part, because the earlier rise in short-term rates was generally ineffective in tightening financial market conditions sufficiently over this period. 5 This means that there is uncertainty about the trajectory of short-term rates from two distinct sources: (1) the economic outlook and what setting of financial conditions this implies is appropriate, and (2) what setting of short rates is consistent with the financial market conditions that the FOMC is seeking to generate. This also suggests that market participants should be cautious in interpreting the Summary of Economic Projection “dot plots” that show the FOMC participants’ modal outlooks for the short-term rate trajectory.