continue for some time) and the economy is proving to be resilient to an increasing Fed Funds Rate (the US equivalent to our ‘Base Rate’).

The US was, in 2021, the first Western market where inflation was creeping up at an abnormally high rate. This was largely due to two factors, supply-side-inflation due to a still largely closed China and an abnormally tight labour market. At one point the labour market had two job opportunities advertised for every applicant, a highly unusual situation.

Three factors have meant that US Inflation is falling at a far faster rate than the rest of the developed world after being the first to peak. 

The US is, from an energy perspective, natural resource independent. As a result, the government have a greater ability to influence energy prices through the release of the Strategic Petroleum Reserves (SPR). This happened to an unprecedented amount in an effort to depress the high oil prices in the aftermath of the Russian invasion of Ukraine. Over 180 days, 180 million barrels were released from the SPR. For context, 17 million barrels were released after the outbreak of the First Gulf War. This has resulted in energy price rises being depressed domestically compared to the majority of the rest of the world.

Where-as pre-2007 nearly 35% of all mortgages were variable, in 2021 this figure was only around 3%. This factor, coupled with the fact that the vast majority of US fixed mortgages are 10 or 30 year fixes, mean that mortgage interest payment changes have had the ‘can kicked far down the road’ compared to the UK. As a result, consumer confidence isn’t being highly affected by increasing interest rates. In turn, this has meant that consumer spending has remained robust compared to the rest of the world (as housing costs have not increased at the same rate) and strong corporate balance sheets have meant that large corporations have remained largely healthy and stable.

Whilst it has proven to be rather ‘sticky’ the US labour market is finally showing signs of loosening. The tightness of the labour market is a key metric that the US Federal Reserve has been monitoring in their fight against inflation while setting interest rates. While this has not yet fed into the headline data, the preliminary data has been showing that the number of applicants are increasing. While it is too early to say confidently whether this will result in an increase in the longer-term unemployment rate, it at present does not yet look like this will be the case and the issue will result in a “soft landing”.

Markets have been rather excited so far this year as US inflation has been dropping rapidly with the thought that this may mean that the Fed Funds Rate may decrease at some point during the year. However, there is still the possibility that it remains above target throughout 2023. Should this prove to be the case, there will be little reason for the Fed to reduce rates. As a result, there is likely to be a see-saw of market optimism in the same way there was in 2022, though I/we would be very surprised if we saw the same overall performance picture of 2022.

Should you have any questions, please feel free to speak to one of our professional advisers.