That was slower than the 2.2% growth rate economists had been expecting and below third quarter growth of 3.5%.
For the year, GDP rose by 1.6%, the slowest since 2011 and down on 2015 when the world's largest economy expanded by 2.6%.
President Donald Trump has promised to lift GDP growth to 4%, through tax cuts and infrastructure spending.
The last time that America's economy grew at that rate was in 2000, the year of the dotcom boom, when it expanded by 4.1%.
While consumer spending rose in the quarter between October to December, the US Commerce Department said there had been a slowdown in exports and an increase in imports.
Friday's figure is the first estimate of economic growth and is based on incomplete data. An updated estimate will be released on 26 February.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said the data highlighted how the heightened political climate in the US and Europe had "put a pinch on US growth".
She added: "Growth in jobs and the economy are the primary concerns of the new US administration and the levels of growth which have been talked about are very optimistic.
Although she cautioned: "With the president less than one week in office and with key global trade agreements, including with the UK, still yet to be decided, it will be a while before we start to see the true impact of Trumponomics."
However, Paul Ashworth, chief US economist at Capital Economics, said the slowdown was not a cause for alarm because the final half of the year was heavily influenced by a temporary swing in exports.
In the third quarter there had been a spike in soybean exports which was not repeated in the final three months of the year. He said: "We would be wary of reading too much into the slowdown in GDP growth."
Optimism about Mr Trump's economic policies has fuelled a rise on the stock market, which this week sent the Dow Jones Industrial Average through 20,000 for the first time.
Full year growth of 1.6% places the US behind the UK, which this week reported that GDP rose by 2% last year. UK output also grew ahead of Germany, the so-called engine room of the European economy, which expanded by 1.9% last year.
UK Prime Minister Theresa May is meeting Mr Trump on Friday, where post-Brexit trade opportunities are expected to be discussed.
The UK cannot negotiate trade deals with other countries until it leaves the European Union, but Mr Trump has said he wants a "quick" deal after that.
The US economy grew at an annual pace of 1.9% in the fourth quarter of last year, according to official figures.