brian p sack : reflections on the talf and the federal reserve ’ s role as liquidity provider remarks by mr brian p sack, executive vice president of markets group of the federal reserve bank of new york, at the new york association for business economics, new york, 9 june 2010. * * * in my remarks today, i had intended to focus on the federal reserve ’ s experience with the term asset - backed securities loan facility, or the talf. this facility, which is scheduled to end later this month, was the last of the federal reserve ’ s special liquidity programs, and those programs were then expected to enter a period of inactivity. it had therefore seemed to be a good time to reflect on our experiences with the talf, and more broadly on the role of the central bank as a liquidity provider. however, the context for this talk has shifted importantly with recent developments in financial markets. in particular, investors ’ concerns about sovereign risk in some european countries, with the attendant pressures on financial firms with exposures in those areas, have put renewed emphasis on liquidity provision and led the federal reserve and five foreign central banks to reestablish dollar liquidity swap lines. accordingly, i will begin today with some remarks on recent financial market developments and the role of the liquidity swap lines. i will then turn to the talf program, providing a review of its performance and assessing the benefits that it provided. both of these programs provide important insights into the role of the central bank as a provider of liquidity, leading to a few observations and to a few questions that i believe warrant further exploration in considering future policy actions. 1 liquidity swaps with foreign central banks the second half of 2009 and the early part of 2010 were marked by substantial improvements in financial markets, ranging from short - term funding to longer term risk assets. there was good reason for those improvements : efforts by the government to stabilize markets and support financial institutions were successful, and a virtuous circle appeared to be under way in which increasing optimism about the economic outlook and improving conditions in financial markets fed upon one another. the gains in asset prices were dramatic, with broad equity indexes reversing most of the declines experienced in late2008 and early 2009 and with some measures of short - term funding spreads returning to pre - crisis levels. however, more recent developments have demonstrated that conditions in financial markets can change abruptly. these developments have been widely discussed at this point, and i

earnings has continued to show high growth, due to a reflection of the results of the annual spring labor - management wage negotiations - - in which the rate of increase in base pay significantly exceeded last year's high rate - - and also due to last year's increase in the minimum wage. meanwhile, potential additional labor supply - - i. e., the difference between the workingage population and the number of employed persons - - is likely to shrink ( chart 8 ). this is because of demographic changes and because labor force participation of women and seniors has already advanced to a high degree. therefore, with labor market conditions becoming increasingly tight, wages will likely become more susceptible to upward pressure. to understand how much capacity firms have for raising wages, i would like to point to labor share, which shows the ratio of labor costs to value - added. labor share is higher at small and medium - sized firms than at large firms, suggesting that their capacity for raising wages is limited. however, looking at wage growth at firms with a high labor share, even small and medium - sized firms tend to have a positive stance toward raising wages if they expect to raise selling prices. with a view to realizing a virtuous cycle between income and spending, i believe it is important to continue to pay careful attention as to whether improving profits, resulting from the passthrough of cost increases to prices, and sustained increases in wages, will spread to micro, small, and medium - sized firms. c. current price developments in japan next, i would like to talk about prices in japan ( chart 9 ). the year - on - year rate of increase in the consumer price index ( cpi ) for all items excluding fresh food is above 2. 5 percent. the year - on - year rate of change in the producer price index ( ppi ), adjusted for the effects of seasonal changes in electricity rates, has risen. this reflects firms'moves to pass on increases in raw material costs, personnel expenses, and other costs to prices, as well as a scaling back of the government's measures to reduce the household burden of higher electricity and gas charges. the year - on - year rate of increase in the services producer price index ( sppi ) has remained relatively high recently at around 2. 5 - 3. 0 percent, mainly on the back of the rise in personnel expenses. the rate of increase in the cpi ( all items less fresh food and energy, 3 / 7 bis - central