This paper examines the interaction between monetary policy and financial stability and provides an assessment of the implications of banks' risk management practices for monetary policy. We derive inertial interest rate rules - characterized by backward and forward interest rate smoothing - by explicitly modeling the desire of the central bank to stabilize different definitions of the basis risk. The paper shows that, contrary to what found in the literature, smoothing interest rates does not in general alleviate problems of indeterminacy of the economy's rational expectations equilibrium. However, from an empirical point of view, monetary policy rules that embed backward and forward interest rate smoothing seem to perform quite well.