April’s FOMC minutes review key international trade activity

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April's FOMC minutes: Key tools to normalize monetary policy (Part 4 of 7)

(Continued from Part 3)

International trade and economic activity

As part of the FOMC meeting held on April 29–30, the FOMC reviewed the U.S. international trade deficit, consumer prices as measured by the personal consumption expenditures (or PCE) price index, and the level of foreign economic activity based on indicators since the committee last met on March 18–19.

U.S. international trade deficit

The U.S. international trade deficit widened in February as exports fell and imports rose. The export declines were concentrated in aircraft and petroleum products, while exports of consumer goods rose. Rising imports of services and automotive products offset declines in the imports of oil and capital goods.

U.S. consumer prices

The PCE price index, which is the prime measure of consumer prices in the U.S., rose at a slow rate. After falling in the fourth quarter, consumer energy prices increased markedly in the first quarter as natural gas prices moved higher on a sharp decline in inventories during the unusually cold winter months. So the core PCE price index, which excludes energy and food prices, rose at the same rate as it had in the previous quarter.

Foreign economic activity

Indicators of foreign economic activity suggested continued expansion, though at a rate lower than in the previous quarter. The deceleration was concentrated in emerging market economies (or EMEs). Highlights in this section included the following.

  • A marked slowdown in real GDP growth in China, largely reflecting lower investment growth and exports
  • In the Euro area, the United Kingdom, and Canada, average industrial production in the first two months of the year was up moderately.
  • In Japan, industrial production rose robustly, and consumer demand was boosted by the anticipation of the April increase in the consumption tax
  • In China and India, inflation fell in the first quarter, largely because of lower food prices.

Accordingly, the FOMC’s monetary policy stance remained highly accommodative during the inter-meeting period in advanced foreign economies (or AFEs) and also in many EMEs, although monetary policy in Brazil tightened to contain inflationary pressures.

Popular ETFs like the iShares JPMorgan USD Emerging Markets Bond Fund (EMB), the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY), and the iShares MSCI BRIC Index Fund (BKF) track securities in emerging market economies. So, major events in these economies directly reflect in the performance of these ETFs.

However, events in EMEs have repercussions on developed markets as well. The prices of broad market ETFs such as the SPDR S&P 500 ETF (SPY), which tracks the large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM), also show volatility with these types of events.

The FOMC’s economic and international trade situation review preceded the committee’s review of the financial situation that has prevailed in the U.S. since its last meeting. The next part of this series discusses the FOMC‘s take on the U.S. economy.

Continue to Part 5

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