The exit strategy that is ultimately implemented will have to take into account the size and structure of the balance sheet at that time. However, in all potential circumstances the Federal Reserve should be able to tighten financial conditions to a sufficient degree when appropriate. The ability to pay interest on reserves, in combination with the ability to drain reserves as needed, will give us sufficient control of short-term interest rates. On that front, it is worth noting that both of the Fed’s reserve draining tools  8  For example, the Desk began to sell dollar rolls to allow for smoother settlement of the Federal Reserve’s purchases. BIS Review 128/2010  5  – the reverse repurchase program and the term deposit facility – are already operational, and their capacity to drain reserves will continue to expand. In addition, the Federal Reserve could always sell assets to reduce the size of its balance sheet if it desired. Designing a purchase program If the FOMC were to move forward with an expansion of the balance sheet, it would presumably want to take into consideration the perspective gained from the asset purchases conducted from late 2008 to early 2010. The FOMC would have to decide the extent to which a new purchase program would follow the approach from the earlier round of purchases. An alternative approach would be to design a purchase program that shares more of the features of the FOMC’s adjustment of the federal funds rate in normal times.
After the drop in the midstream of the crisis, unit labour costs in the region started to rise moderately until 2017-2018 when sharp rise was noticed, supported by the cyclical upturn, as well as the rise of wages in public sector and minimum wages in some of the countries. During 2011-2016, the overall growth of ULCs in the region averaged around 2%, while in 2017 and 2018 the y/y growth picked up to 5% - very close to the pre-crisis average growth. The sharp rise of the productivity adjusted wages should translate into higher core inflation. Yet, it only supported the disposable income and the rise in private consumption, while price pressures remained subdued. This disconnect between unit labour cost and inflation might indicate probable time lag between the two. Or “there might have been structural changes to the way firms incorporate costs into their pricing decisions that has affected the relationship between wage growth and inflation. If firms and workers expect low inflation going forward, for example due to the improved credibility of the central bank, firms may be reluctant to raise their prices even when faced with higher wage costs as they expect increases in costs to be only temporary. In such a situation, the pass-through of higher wages to prices would be muted due to lower expected persistence of cost and price changes.