Firms hit hardest by the 2018–2019 U.S. tariffs saw their cost of equity capital jump by roughly 1.25 percentage points for every standard deviation of tariff exposure, but companies receiving more federal procurement contracts saw about 68 percent of that risk premium wiped away, according to a new working paper published by the Federal Reserve Bank of Boston in 2026. The study reveals what the authors call "fiscal insurance"—a cross-policy mechanism where one government tool partially cancels out the financial and real-world damage of another.
The research links transaction-level procurement records with firm-specific tariff exposure during the Trump administration's trade war. Tariff shocks reduced earnings growth most sharply three to four quarters after the initial hit, but greater procurement offset 30 to 33 percent of those negative effects, showing the cushion extended beyond stock prices into actual business performance. A one-standard-deviation increase in procurement contracts attenuated roughly two-thirds of the tariff-related risk premium investors demanded. The protective effect was strongest for firms with closer lobbying ties to Republican-sponsored legislation and for companies that later won tariff exemptions—the same characteristics that predicted lower tariff-related risk premia in the first place, suggesting investors recognized which businesses were likely to receive favorable treatment.
The authors write that the findings show "a form of fiscal insurance in which government procurement partially offsets the financing and real consequences of tariff exposure." The report concludes that major government policy tools rarely work in isolation, yet research typically studies each as an independent shock. According to the study, the impact of any given policy on firms and markets depends not only on its direct design but also on how concurrent fiscal instruments are allocated across companies.
The research argues that estimates of policy risk or policy uncertainty are incomplete when other stabilizing tools are active at the same time. The same policy shock can produce different financial and real consequences across firms depending on their access to fiscal offsetting, the report finds. The mechanism works because when one policy increases firms' exposure to risk, other fiscal instruments—spending, transfers, or targeted support—may offset that risk through government demand. The authors demonstrate that interactions across government policies affect firms' cost of equity capital, revealing a transmission channel that operates through cross-policy interactions with important implications for how governments influence markets and real economic activity.
The takeaway is clear: understanding policy effects requires looking at the full toolkit, not just the headline measure. When tariffs raised input costs and uncertainty, procurement spending acted as a stealth subsidy—larger for the politically connected, smaller for the rest—and investors priced in who'd get the cushion before it even arrived.