Chicago Fed’s Charles Evans cautions on inflation’s hit to small businesses

Small businesses will be facing growing challenges from inflation and higher wages, Chicago Federal Reserve President Charles Evans said Friday.

Even with average earnings flattening out in February, Evans told CNBC that he hears from smaller companies in his district about the challenges from cost increases.

“I think there are a lot of business models, especially for small businesses, that are going to be challenged for the future,” the central bank official told CNBC’s Steve Liesman during a “Squawk Box” interview. “They’re going to be asked to pay higher wages, and you know if inflation is going up, it’s the real wage that’s going to equate demand and supply.”

Evans spoke just after the Labor Department’s Bureau of Labor Statistics reported that the economy added 678,000 nonfarm jobs in February, considerably higher than expected. The count also indicated that wages rose little over the month and were up 5.1% from a year ago, though that was less than the Wall Street estimate.

Still, even that yearly level is well ahead of anything the economy experienced prior to the Covid pandemic, and Evans said it will exert pressure. The Fed’s preferred inflation gauge shows that inflation even excluding food and energy prices is running at its fastest pace since the early 1980s.

“Wages are going to go up. If rents are going up, gas is going up, food costs are going up, and there are a lot of businesses where margins are very thin,” he said. “Can they really survive that?”

Though Evans generally favors less restrictive Fed policy, he said inflation has rendered the current stance, in which benchmark short-term rates are being held near zero, as “wrong-footed.”

As such, he likely will be among the majority of members this month to vote to raise rates a quarter-percentage point and continue to do so.

“Obviously, we need to be moving toward a more neutral monetary policy certainly by the end of the year, so that we’re within striking distance of taking a position that would deal more forcefully with inflation,” Evans said. “I have said ‘wrong-footed’ [on policy] and I think that’s the right term. It happened very quickly.”

Markets currently expect six 25-basis-point rate hikes this year. Evans said he’s not sure the Fed needs to be that aggressive and the central bank will have a better idea of where it needs to be by the end of the year.