Even though the Fed’s interest rate hikes have maybe started slowing down the hot labor market — which is what the Fed wants, in order to slow inflation — it’s important to keep it all in context.

Over the past year, the Fed has raised the federal funds target rate from basically zero to around 5%, which is historically a really big, really fast increase. And the unemployment rate posted today — 3.5% — is still historically low. 

So, all that talk about monetary policy being a blunt tool — maybe that tool is kind of dull?

If in 2019, Fitch Ratings economist Olu Sonola was told that the Fed would have raised rates this high this quickly, he would have thought “the unemployment rate would have increased by at least one and a half percent.”

Here’s the basic econ 101 logic: The Fed raises the cost of borrowing, consumers spend less, companies can’t finance payroll as easily, the economy slows, and the result is fewer jobs.

But if by later this year the labor market is still this tight, Sonola will start questioning whether COVID has done to macroeconomic theory what it did to something like downtown office buildings.

“What the pandemic has done is introduce a number of variables and elements into the equation that the people who wrote macroeconomic textbooks just didn’t think about,” he said.

Most econ textbooks don’t have chapters on revenge travel, boomer retirements or long COVID, which have kept labor demand higher and supply scarcer. Anil Kashyap, a professor at the University of Chicago’s business school said part of this is just delayed pain. Multiple companies are still paying workers with the help of low-interest loans they took out before rates spiked.

“There’s a bunch of businesses that have loans and bonds that were about zero that are going to need to refinance,” Kashyap said. “And when they do, they’re going to face a much higher cost of capital.”

That’s one example of that famous long and variable lag. And speaking of Fed cliches, calling interest rates a “blunt tool” for the economy might not be the best metaphor. Economist Preston Mui at Employ America says they’re more like a steamroller. 

“So, a steamroller works well if you’re trying to compact gravel or flatten concrete,” he explains. “But if there are large rocks in the way for example, a steamroller is not going to work as well there.”

It’s a helpful analogy, especially because if someone has been laid off, they might feel like they’ve been run over.