Venture capital prepares to ignite stores of dry powder

Despite this persistent issue, the Fed rushed to cut rates by a cumulative 100 basis points at three consecutive meetings in late 2024, which helps to explain Q4’s rise in VC deal value. The reasoning behind these cuts was rather thin, especially coming from the avowedly data-dependent Fed under Chair Jerome Powell. No substantial indications had been given that inflation was tamed, but — looking at the other half of the Fed’s dual mandate — the labor market was not yet grim enough to warrant such intervention.

Any predictions on what the Fed will do in 2025 are necessarily tethered to how consumer prices will react (if indeed they will) under President Donald Trump’s unpredictable, tariff-heavy trade policy. For its part, PitchBook is relatively assured that the fight against inflation will proceed favorably, though it takes care to note the risks inherent to this prediction.

Bain reaffirms this cautious optimism in its most recent “Global Private Equity Report”: “Whether the momentum can build in 2025 will largely depend on macro conditions and policy. … [T]he year’s early slowdown in M&A activity globally suggests that the dreaded U word (uncertainty) continues to keep markets on edge.”

The Fed stands unenviably at a crossroads. If tariffs proceed to have a meaningful impact on consumer prices, then the central bank is charged with maintaining high interest rates until inflation subsides.

Yet if the current environment of quantitative tightness persists much longer, the labor market might threaten to collapse. A spike in unemployment would signal a recession, at which point the Fed would be pressed to slash rates as quickly as possible.

At present, the Fed is likely to continue its hawkish pause at its meeting on Mar. 19. Though slightly weaker than expected, February’s payroll data portrayed a mostly stable labor market that does not require immediate rate cuts.

How the labor market will fare in the rest of 2025 is an open question, however. Government positions accounted for roughly a quarter of the total jobs added in 2023 and 2024, far higher than the 7% share in 2022 and 5% in 2021. The current administration, with the newly created Department of Government Efficiency (DOGE), aims to reduce the national deficit by trimming the federal workforce.

Apollo Global Management forecasts that DOGE’s layoffs will cause total U.S. unemployment to rise by less than 1 million from baseline, which is itself around 7 million. Considering that total employment is 160 million, Apollo argues, DOGE’s cost-cutting measures will have a noticeable but not devastating impact on the labor market.

The consensus outlook for 2025 therefore sees VC as being unaided by any surprise tailwinds from the Fed, which is on course to remain hawkish in the few cuts it allots.

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