Post-COVID jobs data defy interest rate logic.

‍

April’s 177,000 jobs print was more than just a headline beat — it was another sign that the labor market is operating outside the Fed’s old playbook. With unemployment flat at 4.2% and key service sectors still expanding, the U.S. job machine is humming despite restrictive policy. It’s the twelfth straight month of labor resilience, even as real GDP turns negative and the Fed funds rate holds above 5%. Under conventional macro theory, higher interest rates increase borrowing costs, reduce consumption and investment, cool hiring, and ultimately lower GDP, wages, and inflation. In the past this worked.

‍

Today’s economy is playing a different game. In the post-COVID era (2020–2025), the same rate hikes are barely touching the surface. Internal analysis by LevelFields' analysts show a structural break in monetary transmission, with GDP and inflation far less responsive to interest rate shocks than in earlier eras. The Fed can raise rates — but the impact on output and jobs is muted. Why?

‍

Between 2020 and 2025, the federal government spent over a quarter of all its inflation-adjusted expenditures from the past six decades — an unprecedented surge. This spending, coupled with direct transfer payments, industrial subsidies, and debt-financed expansion, distorted the traditional interest rate transmission mechanism. Employers hoarded labor. Households built savings buffers. And now, even negative GDP prints aren’t breaking the employment trend.

‍

But this isn't economic strength — it’s policy inertia. The stimulus artificially delayed the impact of rate hikes. With fiscal buffers now draining and inflation still sticky, policymakers are running out of room.

‍

The Q1 2025 GDP print confirmed what many feared: the post-COVID recovery has hit a wall. Real GDP fell 0.3% — the first contraction since 2022 — and imports surged by over 41% as firms front-loaded inventories ahead of Trump’s sweeping April tariffs. Government spending, despite topping $528 billion in March alone, failed to arrest the decline.

‍