WORKWEEK

Tech may be a bubble cultural but no sector is immune to the global economy. And a lot of tech is tied to the US economy, making the interest rate changes a critical topic to understand.

The Fed shifted from years of having 0 interest rates in an effort to spurt growth, to 7 times in 2022, raising the interest rate all the way up to 4.50%. In the first meeting of 2023, rates went up another .25% earlier today. The goal was to find a balance between not triggering a recession but slowing down the economy and controlling inflation.

Right now, the concern is when inflation will start dropping (it ended the year at 6.5%) and whether this effort to dampen inflation will trigger a recession (and if it does, how severe that recession will be.)

Now, a lot of analysts are expecting a soft landing, avoiding a recession while also controlling inflation. Some are expecting a rougher landing—one with a recession involved.

On the one hand, over the last 11 months, rate increases have slowed down as that, as there are signals that inflation is slowing down. On the other, layoffs seems to be just getting started and there seems to still be some room for valuations to drop in the public and private markets—companies aren’t growing as fast as they were and earnings will be affected over time, unless new revenue streams start working.

In 2023, I’m expecting rate increases to stop and the Fed pause interest rate hikes. Originally I was expecting a rate decrease by the end of the year to jumpstart the economy, but the last thing the Fed will want to do is keep inflation unchecked. 6.5% isn’t great and far away from the Fed’s target of 2%. As I mentioned, some metrics that make up the CPI are slowing down, but they’re still slightly growing with every report. Without managing inflation, we’ll need to increase wages to keep up with a higher cost of living for labor, and inflation can quickly get out of hand.

I think venture capital flows are much more tightly related to the interest rate than people thing. After all, we’ve had nearly zero interest rates since 2008; so there’s not much evidence to determine how correlated these data points are. But when interest rates started going up in March 2022, the venture ecosystem froze as well. As you can see from the CBInsights report on venture capital in 2022, Q1 between 2022 ($73.7 billion) and 2021 ($72.3 billion) was similar. Its Q2 when the venture funding took a huge step back, at the same time the Fed’s first interest rate hike of .25% went into effect.

Once the Fed eases up on the interest rate, venture capital outflows could increase a bit over 6-12 months. But I wouldn’t expect that until the end of 2023 at the earliest. More likely, the Fed will pause on raising rates and will keep things level for the rest of the year.