The Federal Reserve Bank of New York published a research brief on July 8 through its Liberty Street Economics platform detailing how the domestic corporate price-adjustment cycle for tariff-related costs is operating on a far longer timeline than standard economic models predict. The data reveals that 44% of industrial and manufacturing firms and 47% of service-sector firms are still planning additional price increases to offset tariff-induced cost pressures, despite the initial implementation of elevated import duties sitting more than a year in the past. The findings carry direct implications for the Federal Reserve’s inflation outlook and the trajectory of monetary policy through the remainder of 2026.

Key Takeaways

• 44% of manufacturing firms and 47% of service firms surveyed by the NY Fed are planning additional price increases to offset tariff-related cost pressures.
• Among firms still planning hikes, 40% of importing manufacturers and 30% of service firms intend to execute those increases within the next six months.
• A separate cohort of firms — 7% of manufacturers and 16% of service firms — plans to delay tariff-related price adjustments beyond the six-month horizon.
• The NY Fed’s February 2026 regional business survey found that firms expected to raise prices at a pace of just over 4% in 2026, a deceleration from 2025 but still above 2024 levels.
• The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures price index, climbed 4.1% in the 12 months through May 2026, the first reading above 4% in three years.

Why Is the Tariff Pass-Through Taking So Long?

The conventional expectation in trade economics is that tariffs function as a one-time price-level adjustment: duties go up, import prices rise, and the shock dissipates relatively quickly as the new cost structure is absorbed. The NY Fed’s data contradicts that assumption. The research shows that the domestic corporate price-adjustment cycle is more gradual and back-loaded than traditional models predict, with firms spreading their tariff-related price increases across an extended horizon rather than implementing them in a single move.

This pattern aligns with earlier NY Fed findings. In a June 2025 Liberty Street Economics post, researchers Jaison R. Abel, Richard Deitz, Sebastian Heise, Ben Hyman, and Nick Montalbano found that while over half of both manufacturers and service firms raised prices within a month of experiencing tariff-related cost increases, a meaningful share took one to three months or longer. The qualitative research published by the NY Fed in partnership with the Atlanta and Cleveland Federal Reserve Banks revealed that firms balance competing objectives when adjusting prices — monitoring demand conditions, tracking competitors’ behavior, and calibrating the pace of increases to avoid alienating customers.

The result is a slow-release pricing dynamic rather than a single shock. Firms that absorbed margin compression in the initial months following the 2025 tariff escalation are now reaching the point where they can no longer delay passing costs forward. The 44% of manufacturers and 47% of service firms still planning price hikes represent the tail end of a pass-through cycle that began more than a year ago but has not yet fully worked through the domestic price structure.

What Does the Data Show About Timing?

The timing data in the NY Fed’s research creates a cascading picture of price-adjustment waves. Among the firms still planning tariff-related price increases, 40% of importing manufacturers and 30% of service firms intend to execute those hikes within the next six months. That places the next round of tariff-driven price adjustments squarely in the second half of 2026, overlapping with the period in which the Federal Reserve is evaluating whether to raise rates again.

A distinct cohort — 16% of service firms and 7% of manufacturers — intends to delay adjustments beyond the six-month horizon entirely. For those firms, tariff-related price increases may not reach consumers until early 2027, extending the inflationary tail of the 2025 tariff escalation well beyond what most forecasting models incorporate.

The asymmetry between manufacturing and services is notable. Service firms are more likely to be planning future price increases (47% versus 44%) and more likely to be delaying those increases beyond six months (16% versus 7%). That pattern carries particular weight for inflation dynamics because services represent approximately 62% of the core PCE basket. If services-side tariff pass-through is both larger and more delayed than manufacturing-side pass-through, the inflationary impact on the Fed’s preferred measure will be more persistent than goods-price data alone would suggest.

How Does This Fit Into the Broader Tariff Picture?

The NY Fed’s research arrives in the context of a tariff regime that reshaped U.S. import costs throughout 2025. The average statutory tariff rate rose from 2.6% at the start of 2025 to approximately 13% by year-end, according to the NY Fed’s February 2026 analysis. Realized tariff rates — what importers actually paid — peaked at 10.9% by October 2025 before settling at 9.4% by December, according to the Dallas Fed. The Budget Lab at Yale calculated that as of April 2026, the pre-substitution average effective tariff rate stood at approximately 11.8%, the highest since the early 1940s.

The NY Fed’s February 2026 study on who pays for U.S. tariffs found that nearly 90% of the economic burden fell on U.S. firms and consumers. That finding established the direction of cost flow; the July research brief adds the temporal dimension, showing that the downstream pricing response to that burden is still unfolding months after the initial cost shock.

The NY Fed’s March 2026 regional business survey added another layer to this picture. Manufacturing firms reported that goods and materials costs climbed by 8% on average in 2025, while service firms saw a more modest but still significant 5.5% increase. Firms identified tariffed inputs including aluminum, steel, equipment, electrical supplies, auto parts, coffee, and cocoa as primary cost drivers. Despite these elevated cost pressures, firms’ median year-ahead inflation expectations fell to 3.0% in early 2026, down from 4.0% among service firms and 3.5% among manufacturers a year earlier. That moderation in expectations, even as firms plan continued price hikes, suggests that businesses view the tariff-related cost increases as a structural but finite adjustment rather than the beginning of a sustained inflationary spiral.

What Does This Mean for Monetary Policy?

The Federal Reserve held its policy rate at 3.50%-3.75% at the June 16-17 FOMC meeting, with nine officials penciling in at least one additional rate hike before the end of 2026. The NY Fed’s own DSGE model forecast, updated in June 2026, projected that inflation forecasts are higher in 2026 than predicted in March. The Dallas Fed estimated that tariff collections increased March 2026 12-month core PCE inflation by approximately 0.80 percentage points, and that core inflation absent tariff effects on relative prices would be 2.3% — near the Fed’s 2% target.

The pipeline dynamics documented in the NY Fed’s July research brief complicate the disinflation narrative. If a substantial share of tariff-related price adjustments is still being implemented or has been deferred to the next six to twelve months, then the core services inflation readings that the Fed monitors most closely may remain elevated through at least the first quarter of 2027. For rate-setters, the distinction between a one-time price-level adjustment and a prolonged pass-through cycle determines whether tariff-driven inflation should be “looked through” or treated as a persistent pressure requiring a policy response.

The NY Fed’s tariff pass-through data reveals that corporate pricing behavior operates on a timeline that conventional models underestimate, and the staggered nature of those adjustments means the inflationary tail of the 2025 tariff escalation is likely to extend into the next fiscal year.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers should consult a qualified financial advisor before making investment decisions.

FAQs

What did the NY Fed’s July 2026 research brief find? The research found that 44% of manufacturing firms and 47% of service firms are still planning additional price increases to offset tariff-related cost pressures, despite the initial tariff implementation occurring more than a year ago.

How quickly are firms planning to raise prices? Among firms still planning hikes, 40% of importing manufacturers and 30% of service firms intend to execute increases within the next six months, while 7% of manufacturers and 16% of service firms plan to delay beyond six months.

How much did U.S. tariff rates increase in 2025? The average statutory tariff rate rose from 2.6% at the start of 2025 to approximately 13% by year-end, while realized tariff rates peaked at 10.9% by October 2025.

Who bears the cost of the tariffs? The NY Fed’s February 2026 analysis found that nearly 90% of the economic burden of the 2025 tariff increases fell on U.S. firms and consumers rather than foreign exporters.

Why are service firms more likely to delay price hikes? Service firms face different competitive dynamics and contract structures than manufacturers, and 16% of service firms plan to delay tariff-related adjustments beyond six months compared to 7% of manufacturers, suggesting longer adjustment cycles in the services sector.

What is the current federal funds rate? The Federal Reserve held its policy rate at 3.50%-3.75% at the June 16-17 FOMC meeting, with nine officials projecting at least one additional rate hike before the end of 2026.

How much are tariffs contributing to inflation? The Dallas Fed estimated that tariff collections increased March 2026 12-month core PCE inflation by approximately 0.80 percentage points. Absent tariff effects, core inflation would be near 2.3%.

Microsoft is eliminating roughly 4,800 jobs, about 2.1% of its global workforce, in a restructuring announced Monday that concentrates the deepest cuts in its Xbox gaming unit while the company redirects cash toward artificial intelligence infrastructure. The reductions land as investors press Big Tech to show returns on record AI spending.

Key Takeaways

• Microsoft confirmed approximately 4,800 job cuts on July 6, 2026, representing about 2.1% of its workforce.
• The Xbox gaming division absorbs the heaviest impact, with about 1,600 roles eliminated immediately and reductions of roughly 3,200 planned across fiscal year 2027.
• Microsoft shares fell nearly 23% in the first half of 2026, the company’s worst first-half stock performance since 2022.
• The cuts follow voluntary buyouts offered earlier this year to about 7% of the company’s U.S. workforce, or roughly 9,000 employees.

What Prompted Microsoft’s Latest Round of Layoffs

Microsoft framed the decision as part of a continued rebalancing of resources toward high-margin AI and cloud services. The company is cutting the positions as it spends heavily on AI infrastructure and uses the technology to improve efficiency across its business. The move follows a difficult stretch for the stock. Microsoft announced the cuts on Monday after its shares fell nearly 23% in the first six months of 2026, their worst first-half performance since 2022.

The layoffs are the latest in a sequence that stretches back several years. Microsoft cut 10,000 roles in January 2023, another 5,000 later that year, and about 2,000 in 2024. The company earlier in 2026 offered voluntary buyouts to about 7% of its U.S. workforce, or roughly 9,000 employees, and Microsoft often trims jobs near the end of its fiscal year in June as it sets spending plans for the new year.

Analysts read the reductions as a mechanism to fund heavy capital commitments. Gil Luria, managing director at D.A. Davidson, said Microsoft has been managing down its workforce to pay for its AI investments, keeping headcount low to accelerate revenue growth while holding margins steady.

How the Xbox Division Absorbs the Deepest Cuts

Microsoft’s gaming business carries the largest share of the reductions. In a memo posted online, Asha Sharma, the new head of Microsoft’s gaming division, said the team would shrink by approximately 3,200 across fiscal 2027, including about 1,600 role eliminations immediately, with four studios leaving Xbox to new management.

The gaming unit’s economics underpin the decision. Sharma said last month that the division needed a reset, noting its profit margin had fallen to 3% and forcing a restructuring. Cost pressure has compounded the problem. A rise in memory chip prices tied to data center demand forced Microsoft to raise Xbox console prices while demand for the console was already weak. Sharma also pointed to weak returns on content spending. Excluding the Activision Blizzard King acquisition, she said the company had spent over $20 billion on content, platform, and hardware subsidies over five years, while annual revenue declined nearly half a billion dollars during that time.

Where Microsoft’s Spending Is Being Redirected

The offsetting side of the equation is AI and cloud investment. In April, Microsoft forecast quarterly Azure sales above Wall Street expectations while projecting $190 billion in 2026 spending, far above what analysts had anticipated. Azure has been the growth engine. Booming AI demand has powered growth at the Azure cloud-computing business, which was the exclusive seller of OpenAI’s models until April, though the mounting cost of building data centers to run those services is squeezing cash flows.

The strategy also carries a competitive risk for Microsoft’s traditional business. AI tools capable of automating routine business tasks could threaten parts of the company’s software revenue, even as Microsoft invests heavily in the technology.

How Microsoft’s Layoff Rounds Compare

 Why the Cuts Reflect a Broader Industry Pattern

Microsoft joins a wider wave of technology-sector reductions tied to AI economics. Big Tech’s AI spending is expected to exceed $700 billion this year, raising investor expectations that companies will offset the growing cost of building and operating the technology, and Amazon and Meta Platforms have also cut thousands of jobs in 2026.

Wall Street’s initial reaction was muted. MSFT shares traded nearly flat in early trading, with analysts viewing the move as a continuation of the efficiency drive that began in 2023. Microsoft is expected to report financial results later this month, which will offer investors a clearer view of how the restructuring feeds into margins and Azure demand.

Microsoft’s decision to shed 4,800 jobs while committing tens of billions to data centers signals that AI infrastructure spending, rather than headcount, now defines how the company measures growth.

FAQs

How many jobs is Microsoft cutting? Microsoft is eliminating approximately 4,800 positions, or about 2.1% of its global workforce. The cuts were announced on July 6, 2026.

Which division is most affected? The Xbox gaming division carries the largest share, with about 1,600 immediate role eliminations and reductions of roughly 3,200 planned across fiscal 2027. Commercial sales and consulting teams are also affected.

Why is Microsoft laying off workers while investing in AI? The company is redirecting spending toward AI and cloud infrastructure. Reducing headcount helps fund large capital commitments while maintaining profit margins, according to analysts.

How has Microsoft’s stock performed in 2026? Shares fell nearly 23% during the first six months of 2026, the company’s weakest first-half performance since 2022.

Did Microsoft cut jobs earlier this year? Yes. The company offered voluntary buyouts to about 7% of its U.S. workforce, roughly 9,000 employees, before the July reductions.

Are other tech companies making similar cuts? Amazon and Meta have also reduced thousands of roles in 2026 as Big Tech AI spending is projected to exceed $700 billion for the year.

When will Microsoft report earnings? Microsoft is expected to release financial results later in July 2026.

US job growth slowed sharply in June 2026, with nonfarm payrolls rising by 57,000, the weakest gain in four months and well below the roughly 110,000 economists expected. The unemployment rate fell to 4.2%, a 12-month low, though the decline stemmed largely from workers leaving the labor force rather than a strengthening jobs market.

Key Takeaways

• The Bureau of Labor Statistics reported June nonfarm payrolls increased by 57,000, below the 110,000 to 115,000 consensus and the slowest pace in four months.
• The unemployment rate fell to 4.2%, driven by a drop in the labor force participation rate to 61.5%, its lowest level since March 2021.
• April and May payrolls were revised down by a combined 74,000, and leisure and hospitality shed 61,000 jobs in June.
• Stock futures rose and Treasury yields fell as investors reduced expectations for a Federal Reserve interest rate increase in September.

How Weak Was the June Jobs Report?

The June reading marked a clear cooling in the US labor market after three consecutive months of stronger-than-expected gains. The Bureau of Labor Statistics reported that total nonfarm payroll employment rose by 57,000, roughly in line with the average monthly change of 36,000 over the prior 12 months but far short of the pace seen through the spring. The figure undershot the Dow Jones consensus estimate of around 110,000 to 115,000.

Revisions deepened the picture of a slowing labor market. The Bureau of Labor Statistics lowered its April count by 31,000, from 179,000 to 148,000, and its May count by 43,000, from 172,000 to 129,000. The two revisions combined left employment 74,000 lower than previously reported, undercutting the narrative of accelerating job creation that had built up over recent months.

Why Did the Unemployment Rate Fall to 4.2%?

The drop in the headline unemployment rate to 4.2% reflected a shrinking labor force rather than robust hiring. The labor force participation rate fell 0.3 percentage points to 61.5%, its lowest level since March 2021. Because the unemployment rate measures the share of the labor force actively seeking work, people leaving that pool mechanically lowered the rate even as underlying conditions softened.

The household survey pointed to strain beneath the surface. The Bureau of Labor Statistics reported that the number of people employed fell by 507,000 during the month, while the employment-population ratio edged down 0.2 percentage points to 59.0%. The number of people working part time for economic reasons held near 4.7 million, and roughly 6.0 million people not in the labor force reported wanting a job.

Which Sectors Gained and Lost Jobs?

Hiring in June concentrated in a narrow set of industries. Professional and business services added 36,000 positions, social assistance contributed 25,000, and health care continued its upward trend with 22,000, though at a slower pace than its 38,000 monthly average over the prior year. Hospitals accounted for 9,000 of the health care total.

Leisure and hospitality moved in the opposite direction, shedding 61,000 jobs in a decline the Bureau of Labor Statistics attributed to weaker-than-usual seasonal hiring. The result also cut against pre-report speculation that FIFA World Cup activity might lift summer payrolls; Goldman Sachs had estimated a possible gain of 40,000 tied to the tournament. Most other major categories, including mining, construction, manufacturing, wholesale and retail trade, transportation and warehousing, information, financial activities, and government, showed little net change.

What Did the Wage Data Show?

Wage growth held steady, offering a counterweight to the softer payroll and household figures. Average hourly earnings for all employees on private nonfarm payrolls rose 13 cents, or 0.3%, to $37.64 in June. Over the prior 12 months, average hourly earnings increased 3.5%, a modest acceleration from the 3.4% annual pace reported the previous month. The average workweek for all employees held at 34.3 hours.

How Did Markets React to the Data?

Financial markets treated the softer report as a signal that the Federal Reserve faces little pressure to tighten policy. Stock market futures rose following the release, and Treasury yields declined, with the policy-sensitive 2-year yield falling 3.5 basis points to 4.13%. Investors trimmed the odds of a rate increase at the September meeting.

The report arrived as new Federal Reserve Chair Kevin Warsh weighed the inflation outlook, having noted at the European Central Bank forum in Portugal that prices remained too high. Attention now shifts to the June Consumer Price Index, scheduled for release on July 14, 2026, which will shape expectations for the Federal Reserve’s path through the second half of the year.

The June employment report reframed the labor market debate, showing job creation cooling and workers exiting the workforce even as the unemployment rate reached a 12-month low.

FAQs

How many jobs did the US economy add in June 2026? The Bureau of Labor Statistics reported nonfarm payrolls rose by 57,000 in June, the slowest gain in four months and below the roughly 110,000 economists had expected.

Why did the unemployment rate fall if job growth slowed? The unemployment rate fell to 4.2% because the labor force participation rate dropped to 61.5%. When people stop actively looking for work, they are no longer counted as unemployed, which lowers the rate.

How large were the revisions to prior months? April and May payrolls were revised down by a combined 74,000, with April cut to 148,000 and May cut to 129,000.

Which industry lost the most jobs in June? Leisure and hospitality lost 61,000 jobs, which the Bureau of Labor Statistics linked to weaker-than-usual seasonal hiring.

How did the jobs report affect Federal Reserve rate expectations? Investors reduced expectations for a September rate increase. Stock futures rose and Treasury yields fell as the data suggested the Federal Reserve is under little pressure to tighten.

When is the next major inflation reading? The June Consumer Price Index is scheduled for release on July 14, 2026, and will influence expectations for Federal Reserve policy.