current situation is relative to previous experiences. i want to make a few points here. we expect the fed to move more gradually than on previous occasions why? first, the fed prefers to err on the side of moving slowly, and markets expect so. in part, as seen in figure 3, inflation measured as the pce core is still low compared to its level on previous hiking cycles. also, neutral rates are estimated to be very low this time, so the fed considers that monetary policy is not as expansionary as the headline fed funds rate suggests. besides, the federal reserve is very much aware of the financial stability risks of abrupt changes in rates. the term premium implicit in long term yields is very low, and the taper tandrum episode of 2013 shows that it can change fast if markets misinterpret the fed communication. the fact that in previously cycles this did not happen is good news, but a series of good output numbers in the us, a few higher ‐ than ‐ expected inflation prints, or a change in the strategy on how to manage the balance sheet of the fed could, trigger a significant increase in long term rates. 7 bis ‐ based real exchange rates ; for argentina, brazil, chile, colombia, mexico, peru and venezuela. the current trajectory of the dollar / commodities / credit spreads provide mix evidence other dimensions suggest we are somewhat in between the 1994 and 2004 episodes. the dollar has strengthened in multilateral terms in the last quarters, similarly to what was seen in 1994. commodities have shown a mild upward trend. definitely smoother than their trend in 2004, but also markedly more bullish than in 1994. finally, embi spreads have decreased in tandem to what they did in 2004. indeed, capital inflows have returned massively to the region in the last few months. in other words, while commodities are not as supportive of emerging economies as they were in the previous decade, markets are showing a high appetite for emerging market debt. this suggests two things. on the one hand, there is room for a recovery in emerging economies, and markets are pricing that in. but on the other hand, this recovery will not be supported by a commodity cycle as we experienced in the 2000s, so the region is more exposed to financial shocks coming from a disorderly normalization of monetary policy in the united states. emerging economies are better prepared than in the 1990s to absorb these shocks, but we do not expect the subsidy coming from the commodity windfall.

what to expect from the fed ’ s monetary policy normalization? 1 sebastian claro vice ‐ governor, central bank of chile i would like to start thanking the organizers for this invitation. let me start with a disclaimer. next monday, april 3rd, the board of the central bank of chile will present its inflation report to the senate. therefore, i will not be able in this occasion to offer a detailed discussion on the macroeconomic situation and perspectives in chile, which will be described in detailed in the report. rather, i have decided to focus on a broader issue that is relevant for chile and the region in the current scenario. during 2017, we will finally witness the process of monetary policy normalization in the united states. after almost 8 years keeping the federal funds rates essentially at zero, the federal reserve has started a gradual process of interest rate hikes. this is good news. fundamentally, the normalization of monetary policy is the natural consequence of a normalization of the us economy after the global financial crises. a normal us economy is a positive phenomenon for the world economy. however, this transition period may become bumpy. indeed, previous episodes of rate hikes by the federal reserve have not been smooth at all for emerging economies. the most obvious of these examples is the debt crisis in the early 1980s. on top of a series of macroeconomic imbalances in many latin american countries, the sharp raise in interest rates generated a strong reversal in capital flows and pressure on fx markets on the region that induced a collapse in financial markets and activity across countries. since the early 1990s, we can identify two main periods of interest rates rises in the united states, as seen in figure 1. the first one started in february 1994, and it comprised a hike of 300 bp in almost a year. the second one took place a decade later when, after a few quarters of the then historically ‐ low rates, the fed started a process of rate normalization in june 2004, increasing almost 450 bp in about two years. 2 for the sake of this presentation, i want to offer a simple comparison on these two episodes, which in some dimensions were very similar. in particular, the cyclical position of the us economy was arguably very similar in both occasions, and the process of monetary policy normalization is pretty comparable. however, the performance of emerging markets in these two episodes was very different. indeed, overall, the process of fed funds increases in early 1994 was followed by large difficulties in developing