In other words, we needed to act and communicate in order to tighten financial conditions further, including by shifting up the interest rate path expected by markets. Thus, we raised our rates by 50 bp and, more importantly, we signalled our intention to continue raising them significantly at a steady pace to reach sufficiently restrictive levels, and to keep them there for some time. 1  Indeed, after our December communication, there was an upward shift in the risk-free (OIS) forward curve. 1 In particular, the day before our February meeting, the 10-year OIS rate was 0.27 basis points (pp) higher than before the December meeting, while the 3-month OIS rate was 0.51 pp higher. Equally important, in real terms the 10-year OIS rate was 0.51 pp higher than in December, once adjusted for market inflation expectations. And the euro had simultaneously appreciated by 2.88% against the dollar in the same period. Our February decision represents a continuation (i.e. “staying the course”) of the policy tightening path that we signalled in December. Continuing this path was based both on our updated assessment of the inflation outlook and on the financial conditions prevailing in capital markets at that time. Let me address each element in turn. As regards the inflation outlook, at our February meeting we did not have the benefit of a new round of staff macroeconomic projections. But as I said before, our assessment of the inflation outlook is based on a wealth of information, which also includes s urvey-based and market-based indicators.
First was the so-called flash rally of October 2014; then, the repo market distress in September 2019; and third, the extraordinary dislocations at the onset of the COVID-19 pandemic in March of 2020. General George Patton once said, “Prepare for the unknown by studying how others in the past have coped with the unforeseeable and unpredictable.” It’s a good piece of advice—and one that 1/4  BIS central bankers' speeches  should guide our work on Treasury market reform. The IAWG report I mentioned earlier reviews these events, so I won’t repeat them here. However, two lessons are clear. First, the unforeseeable and unpredictable will happen, and can result in significant stresses in the Treasury and related markets that may spread to broader financial conditions. Second, when disruptions have been sufficiently severe and persistent, the market has not been able to quickly self-correct without official-sector intervention. The severe disruptions to the Treasury and funding markets in March of last year illustrate these points. The incipient breakdown in market functioning quickly spread to other segments of the U.S. and global financial markets, risking a broad-based pullback in the availability of credit that is essential for our economy. The speed and extent of the market disruption necessitated immediate and dramatic action, the scale of which was truly unprecedented. At the New York Fed, we are used to talking in very large sums, but even for us, the figures were staggering.