Fed's First Rate Hike in Three Years Rattles Santiago, Tests Central Bank's Hand

The Federal Reserve just lit the fuse the financial world had been dreading for months: its first rate hike in more than three years arrived today with an unmistakably hawkish tone, and its effects were felt immediately in Santiago, where the dollar touched $960 —its highest level in eleven months— and the IPSA slid 0.77%, dragging Cencosud (-1.45%), Falabella (-1.08%) and SQM (-0.88%) down as the session's biggest casualties.

The Fed's decision to raise its benchmark rate by 25 basis points, taking it to the 3.75%-4.00% range, was unanimous under the chairmanship of Kevin Warsh and came accompanied by signals of an additional adjustment before year-end. The immediate trigger was an upside surprise in U.S. retail sales, which dispelled any lingering doubts about the strength of domestic demand in that country. Two-year Treasury yields rose 5.2 basis points, while 30-year notes edged lower, a sign that the market is pricing in near-term tightening while keeping long-term expectations anchored. Donald Trump wasted no time reacting, demanding on Truth Social rates of "1% or less," but the central bank ignored the political pressure with the same coolness it has shown in previous episodes. On Wall Street, the Dow Jones lost 631 points and the S&P 500 fell 0.45%, while Bank of America and Wells Fargo each dropped 3% on fears of a credit contraction.

The timing could not be more uncomfortable for Chile. The Central Bank, which at its September 8 meeting held the Monetary Policy Rate at 4.50% on the grounds that it was "clearly dominant" given that inflation —currently at 4.1% year-on-year— is converging toward the 3% target by the second quarter of 2027, now faces an external environment that narrows its room for maneuver. A more hawkish Fed widens the rate differential in favor of the dollar, pressures the exchange rate and, if oil rebounds from current levels, could reignite inflationary pressures via fuels. The government has already spent more than 700 million dollars on subsidies through the Fuel Price Stabilization Mechanism since the U.S.-Iran conflict triggered the rise in crude at the end of February, and in March had to overhaul the mechanism after finding that its cost had climbed to between 150 and 200 million dollars per week, passing on to consumers price hikes of $370 per liter on 93-octane gasoline and $580 on diesel. A fresh oil rally would reopen that fiscal front with renewed force.

It is against this backdrop of external pressure that the agenda unveiled this week by José Antonio Kast's government at the ChileDay events in London and Madrid takes on particular relevance. Finance Minister Jorge Quiroz returned with a positive read on the event, though he acknowledged that investors raised concrete concerns around permitting and security. The centerpiece of the official message was the capital markets reform —MK4, in local parlance— whose approval before year-end is drawing growing optimism: Senate President Paulina Núñez promised it in Madrid, Quiroz reaffirmed it in London, and Congressman Agustín Romero, chair of the Chamber's Finance Committee, went so far as to pencil in the week of October 19 as the ideal date for the vote in his committee. Former Finance Minister Felipe Larraín was even more ambitious, suggesting that Chile could become a regional financial platform comparable to Singapore, Luxembourg or Ireland. Capital markets coordinator Eugenio Symon set a more sober yardstick for gauging the reform's success by 2030: whether Chile is intermediating substantially more capital.

Another topic that dominated ChileDay was the institutional framework governing pensions. Superintendent Joaquín Cortez, confessing to having been initially skeptical of generational funds, declared himself a convert to the work of economist Robert Merton, and used the London forum to propose that the Pensions Superintendency shift from a single-person model to a collegiate one. The sharpest warning, however, came from the regulator himself and from the president of the AFP Association, León Fernández de Castro: both flagged the risk of political authorities ending up defining the funds' investment strategies, a possibility Cortez described with the phrase "perhaps, in the long run, the enemy is the government." Finance, for its part, is moving ahead with the renewal of the CMF, sounding out former BancoEstado general manager Óscar González and the banking industry's chief counsel, Juan Eduardo Laval, to replace commissioners Augusto Iglesias and Bernardita Piedrabuena.

In the mining sector, the Minister of Economy and Mining previewed in London lithium opportunities in various salt flats and called on private miners to partner with Codelco, while the state copper company's director, Luz Granier, proposed a shared-infrastructure model to avoid duplicated investment. The official optimism contrasts, however, with a severe diagnosis: Cochilco warns that the lithium oversupply will extend through 2028, capped by the return of suspended operations, new projects and weakness in Chinese domestic consumption. Minister Quiroz himself spoke of a "mining recession" as a latent risk. From London, Pampa Investments Vice President Francisca Ponce welcomed the government's push on lithium and Grupo Pampa's entry into the IPSA, though she acknowledged that the price environment remains the sector's main constraint. On copper, Antofagasta Minerals CEO Iván Arriagada, whose company trades on the London Stock Exchange, projected additional demand of 10 million tonnes per year by 2040, driven by data centers and artificial intelligence, and explicitly praised the Kast government's National Reconstruction Law as a signal of legal certainty.

On the domestic front, the discount retail segment is gaining ground with two simultaneous moves: Cencosud, which trades on the Santiago Stock Exchange and has ADRs on NYSE, accelerated the expansion of its Don Salva chain to 11 locations in the Metropolitan Region in just four months, with 180-square-meter low-price stores; and Chilean firm Rincón Mayorista, born under the Rosenqvist family umbrella out of the distributor Comercial Sudamericana, announced the launch of its own chain of discount supermarkets. The move reflects an underlying trend: consumers under pressure migrating toward cheaper formats, a trend that would intensify if a high dollar and expensive fuel further erode household purchasing power.

For the remainder of the year, markets will be closely watching the trajectory of the dollar, which at $960 is already trading at highs not seen since October 2025, and the Central Bank's reaction if currency pressure threatens the path of inflation convergence. The MK4 vote in the Chamber in October will be the first legislative test of the optimism on display at ChileDay. And the 2027 Budget, whose drafting is advancing amid calls from Libertad y Desarrollo for spending to grow at its slowest rate in more than a decade, will determine whether the promise of reactivation has the fiscal room to materialize or remains a backdrop to an economy that has now spent 42 months with unemployment above 8%.

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