"The possibility that firms will absorb at least part of the levies by reducing their profit margins depends also on the state of their balance sheets. Here, financial data provide important insight. Broadly speaking, firms’ financial positions remain healthy, with elevated profit margins – suggesting that overall, firms are in a reasonably good place to bear some of the increased costs from tariffs," says Susan M. Collins, President of the Federal Reserve Bank of Boston.
"Determining how much demand may slow from tariffs is also important, and here households’ financial conditions are particularly relevant. In this regard, I’ll note that households’ balance sheets also remain healthy overall, as evidenced by household net worth, which as a percentage of disposable income remains high by historical standards. This suggests that a typical household has the resources to at least partly offset a tariff- induced loss in purchasing power. Of course, the aggregate data often mask substantial differences across firms and households.
In all, financial data point to the possibility that the impact of tariffs may be lessened somewhat by an ability for firms to decrease profit margins and for consumers to continue spending, despite higher prices. As a result, the adverse impact of tariffs on labor market conditions and economic growth may be more limited.
Clearly, uncertainty remains elevated. Pulling together the many types of data and analyses my staff and I examine, my expectation is that tariffs will boost inflation over the second half of this year. While the extent of the increase remains uncertain, it seems likely that core PCE inflation will be in the vicinity of 3 percent by year’s end, before resuming its decline. Concerning the labor market side of our mandate, tariffs should slow demand and hiring, though not necessarily by a large amount."
