OLDWICK, NJ–(BUSINESS WIRE)–Supported by government spending and extraordinary accommodative monetary policy, the U.S. economy grew 5.5% year-over-year in 2021, the strongest economic expansion in decades. However, according to a AM Best report, there are several headwinds heading into 2022 for the U.S. economy, including the possibility of a Federal Reserve monetary policy misstep, geopolitical tensions, and persistently high inflation.
A new Best Special Report, titled “US Economy: A Long and Winding Road”, notes that strong economic growth has led to the creation of more than six million jobs in 2021. However, this strong growth has been accompanied by the highest level of inflation. high for decades, with headline inflation registering 7.1% in December. As a result, towards the end of 2021, expectations for a reduction in dovish policy have shifted significantly. The steady improvement in the labor market and the persistence of high inflation prompted the Fed to reorient itself and begin tightening measures sooner than it had initially planned.
“The Fed will have to walk a tightrope as it attempts to rein in inflation, without halting economic growth,” said Ann Modica, associate director, AM Best credit rating criteria, research and analysis. “A misstep would be a very big, if not the biggest, risk to the U.S. economy. If the Fed is late in raising rates, it runs the risk of entrenching inflationary pressures, and then it could be forced to act aggressively to tighten credit On the other hand, tightening too much too quickly would have negative implications for the ongoing economic recovery.
The housing market had another strong year in 2021, helped by low mortgage rates, amid continued shifts in housing demand driven primarily by more people working remotely and millennials entering into the housing market in record numbers. In 2021, millennial buyers accounted for more than half of all home purchase loan applications. Still, there are plenty of headwinds clouding the housing market outlook for 2022, including a continued lack of inventory, record house prices, rising building material prices and rising mortgage rates.
Greater uncertainty about monetary policy and the extent and pace of Fed tightening will likely lead to greater uncertainty and volatility for financial markets in 2022. As the Fed begins to normalize policy, the end of the Quantitative easing will have implications for bond and equity markets. Other risks to 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 political uncertainty in the United States in due to the 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 more than 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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