OLDWICK, N.J.--(BUSINESS WIRE)--Supported by government spending and extraordinary accommodative monetary policy, the U.S. economy grew by 5.5% year over year in 2021, the largest economic expansion in decades. However, according to an AM Best special report, there are several headwinds at the beginning of 2022 for the U.S. economy that include the potential for a Federal Reserve monetary policy misstep, geopolitical tensions, and persistently high inflation.
A new Best’s Special Report, titled, “U.S. Economy: A Long and Winding Road,” notes that the strong economic growth resulted in the creation of over six million jobs in 2021. However, this strong growth was accompanied by the highest level of inflation in decades, with headline inflation registering 7.1% in December. As a result, toward the end of 2021, expectations for a reduction in accommodative policy shifted forward notably. A steadily improving labor market and persistently high inflation have caused the Fed to pivot and commence tightening measures sooner than it initially expected.
“The Fed will need to walk a tightrope as it tries to tame inflation, without grinding economic growth to a halt,” said Ann Modica, associate director, AM Best credit rating criteria, research and analytics. “A misstep would be a very significant—if not the biggest—risk for the U.S. economy. If the Fed is behind the curve in raising rates, it runs the risk of anchoring inflationary pressures, and it then may be forced to act aggressively to tighten credit. On the other hand, tightening too much and too quickly would have negative implications for the ongoing economic recovery.”
The housing market enjoyed another strong year in 2021, aided by low mortgage rates, amid a continued shift in the demand for housing brought about predominantly by greater numbers of people working remotely and millennials entering the housing market in record numbers. In 2021, millennial buyers accounted for more than half of all home-purchase loan applications. Nevertheless, numerous headwinds cloud the 2022 outlook for the housing market, including a continued lack of inventory, record-high home prices, rising prices for building materials and an increase in mortgage rates.
Greater uncertainty about monetary policy and the extent and pace of Fed tightening will likely cause greater uncertainty and volatility for the financial markets in 2022. As the Fed begins to normalize policy, the end of quantitative easing will have implications for the bond and equity markets. Other risks for the financial markets include persistently high inflation, negative real yields and the resulting negative impacts on economic growth, as well as numerous geopolitical risks and higher levels of U.S. political uncertainty due to midterm elections.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=317692.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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