Re:Twilio is firing 17% of workforce
by 300bps on Monday February 13, 2023 @01:37PM
(#34778024)
We hired more than we meant to. How does that happen?
Every explanation here thus far misses one simple fact: interest rates.
Imagine the more people you hire, the more money you make and/or the more dominant of a market position you assume.
Now imagine the Federal Reserve has lowered the Federal Funds Target rate to 0 and is performing FOMC operations to buy $9 trillion of bonds to lower interest rates across the board. This is what they did:
So imagine firms can go on a hiring spree with almost-free money. Consider that WACC (weight average cost of capital) is one of the key factors in calculating the NPV of a project. Now consider that a positive NPV means you should do the project. This means a lot of projects (and hence hiring) get greenlit.
Now imagine the Federal Reserve says, “Party’s Over, guys!” and raises the FFT rate and stops buying bonds. Almost free money goes away, the WACC increases and now the NPV of all those juicy projects goes negative.
Add in an expected recession, the ability to cull the bottom x% performers and you get a recipe for widespread layoffs.
Every explanation here thus far misses one simple fact: interest rates.
Imagine the more people you hire, the more money you make and/or the more dominant of a market position you assume.
Now imagine the Federal Reserve has lowered the Federal Funds Target rate to 0 and is performing FOMC operations to buy $9 trillion of bonds to lower interest rates across the board. This is what they did:
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
So imagine firms can go on a hiring spree with almost-free money. Consider that WACC (weight average cost of capital) is one of the key factors in calculating the NPV of a project. Now consider that a positive NPV means you should do the project. This means a lot of projects (and hence hiring) get greenlit.
Now imagine the Federal Reserve says, “Party’s Over, guys!” and raises the FFT rate and stops buying bonds. Almost free money goes away, the WACC increases and now the NPV of all those juicy projects goes negative.
Add in an expected recession, the ability to cull the bottom x% performers and you get a recipe for widespread layoffs.