What’s going on in the economy, and how should investors respond?
When the COVID-19 pandemic landed on American shores in March of this year, the Federal Reserve – America’s central bank – took swift action to lower interest rates, inject money into the economy, and backstop consumer loans. Since then, we’ve seen a period of unprecedentedly low interest rates and a stock market that, despite millions being out of work, has continued to rally.
But what does this all mean for investors? How should the Fed’s landmark policy shifts affect your investment strategy? We spoke with Amit Raizada, an experienced venture capitalist and CEO of Spectrum Business Ventures, to learn more about this unique moment in our country’s economic history and how shrewd investors should best respond.
What is the Federal Reserve, and what does it do?
To answer these questions, it is imperative that aspiring venture capitalists and investors understand how the Federal Reserve works.
Commonly referred to as “the Fed,” the United States Federal Reserve System is the country’s central bank. The Fed sets monetary policy to fulfill a unique “dual mandate” of pursuing maximum employment and price stability. In other words, the Fed seeks to keep inflation low and employment high.
At its most basic level, the Fed does this by regulating the money supply, or the total amount of United States currency in circulation, to stimulate or slow down the pace of economic growth. If the U.S. economy were a car, the Fed would be both the gas pedal and the brakes, speeding the economy up in times of distress, and keeping it from overheating in times of prosperity.
“The main way that the Fed speeds up or slows down the economy is through interest rates,” Raizada said. “When the economy is running at full-force, the Fed may opt to gradually raise interest rates. This makes it more expensive to borrow money and incentivizes investors and consumers to hold onto their funds. This slows growth but eats away at inflation, keeping the economy healthy in the long-run.”
In times of economic downturn, the Fed will do the opposite – lower interest rates. This makes it easier to borrow money, Raizada said, and firms and individuals will take advantage of the easy credit to invest. In theory, these investments then spur new jobs and get the economy back on track.
What does this all have to do with what we’re seeing right now?
Many investors and analysts have commented on the current dissonance between the stock market—which just finished one of its most successful quarters—and the job market—which remains mired in near record-level unemployment.
“This is an opportune moment for investors and entrepreneurs alike,” Raizada said. “With interest rates so low, securities like bonds—traditionally quite popular—are yielding low returns and becoming less attractive to investors.”
Raizada recommended that aspiring investors use this opportunity to search for innovative new ventures.
“There are a plethora of innovative firms that are hungry for investment,” Raizada said, “but you shouldn’t just throw your money behind any firm. Look toward the younger generations and think about their unique preferences. What emerging market trends do they illuminate? What industries are they bound to disrupt? Then, do some due diligence and back an innovative, cutting-edge firm that meets these needs of these nascent consumers. These are the firms that be could reshaping the structure of our economy in ten or fifteen years.”
Savvy entrepreneurs should also see opportunity in these unique economic conditions, Raizada said.
“As an entrepreneur, I know how difficult it can be for start-ups to raise capital,” Raizada said. “But right now, investors are hungry for opportunities in disruptive firms. Entrepreneurs should use this to their advantage—finding investors to give life to their firms and parlaying their revolutionary ideas into the blue-chip companies of the future.”