Federal Reserve

Big mergers could put Fed on hold for more rate hikes, Evans says

Key Points
  • Chicago Fed President Charles Evans said he is "nervous" about inflation and believes big corporate deals could exert downward pressure on inflation.
  • His remarks come after the Amazon-Whole Foods deal that some economists believe will pressure prices lower across the retail industry.
Fed's Evans: Recent inflation data did make me nervous
Fed's Evans: Recent inflation data did make me nervous

One of the things that could knock the U.S. central bank off its rate-hiking schedule is a rise in disruptive corporate deal-making, Chicago Fed President Charles Evans said Tuesday.

Without mentioning any specific mergers or acquisitions, Evans said transformative moves could put pressure on inflation which in turn would slow the Fed from continuing on its path toward policy normalization. He said he remains confident in the economy but is "nervous" about inflation.

"In a world of global competition and new technology, I think competition is coming from new places. New partners are choosing to merge and sort of changing the marketplace and [bringing] more competitive pressures on price margins," Evans told CNBC's "Squawk on the Street" program.

"If that's the case, and I think that's just speculative at this point, then it means that we need even more accommodation to get inflation up," he added.

The Fed is charged with two goals: maximum employment and price stability. While the unemployment rate has tumbled to 4.3 percent during the Fed's historically aggressive policy moves since the financial crisis, inflation has remained elusive.

The Fed has set 2 percent as an inflation goal, but last week reduced its forecast for this year from 1.9 percent to 1.6 percent. Despite the miss on inflation, the policymaking Federal Open Market Committee voted to hike rates a quarter point, and has indicated one more increase is on the way later this year.

However, Evans said more signs of downward pressure on inflation would indicate "that we need even more accommodation to get inflation up, because the changes in price margins would reduce relative prices."

Charles Evans, president and CEO of the Federal Reserve Bank of Chicago.
David Orrell | CNBC

"That's good for the consumer," he added, "but it's going to find its way into a lower price level, and we'd need more accommodation to get inflation up to 2 percent."

Economists at the Fed believe 2 percent is a healthy level of inflation. While low levels of inflation indeed can benefit consumers through lower prices, they also can threaten economic growth, limit earnings and discourage spending.

Evans' remarks come just a few days after Amazon announced a blockbuster deal to buy Whole Foods, the online marketplace's biggest excursion into the brick-and-mortar retail space. Analysts and economists believe one of Amazon's first priorities will be to lower prices at the upscale grocer, a move that would lead to industry-wide pressures and overall lower inflation.

Evans did not mention the deal during the interview. However, he did discuss some of the broader issues affecting inflation and what impact they have on Fed policy.

"For every company that sees the value of their capital go up, there's another company that has been disrupted and the value of their capital gets marked down because it's not going to compete in the same way," he said.

Evans believes the Fed has a window of time to watch the data before hiking again.

"We can go until December and make a judgment," he said. "I think we have to look at the data and see how things improve."

Traders in the fed funds futures market believe there's a 50 percent chance the FOMC will increase rates once more this year. Observers generally believe the Fed will begin unwinding its $4.5 trillion balance sheet — the portfolio of fixed income it has accrued in its economic stimulus programs — in September.

Watch: Evans says 3 percent economic growth is possible in the short-term, but more needs to be done to sustain that level.

Fed's Evans: Possible to get short-term 3% growth
Fed's Evans: Possible to get short-term 3% growth