President Donald Trump has a real bone to pick with Amazon, but the e-commerce giant could actually be helping him when it comes to inflation, interest rates, the Federal Reserve, and economic growth.
Trump has persistently railed against Amazon, attacking its tax practices and accusing the corporation of having a “huge antitrust problem.” On Friday, Trump alleged that Amazon takes unfair advantage of the US Postal Service — which it doesn’t. (While USPS could be charging more to deliver packages for Amazon and others, that’s not the root of the agency’s fiscal problems.)
As far as Amazon goes, however, it might behoove the president to take a softer rhetorical line, especially if he is — as he’s said — concerned with keeping inflation and federal interest rates low. Amazon, you see, helps do both things, and in the process it grows the economy. Here’s how.
The Fed uses interest rates to influence employment, inflation, and the economy
To zoom out a little bit: The Federal Reserve is the central bank of the United States. One of its main responsibilities is managing interest rates and influencing the availability and cost of credit in the American economy. It sets the “federal funds rate” — the interest rate banks charge each other for overnight loans — and can adjust the rate to sway the economy.
During the Great Recession, the Fed slashed interest rates to zero and kept them there for years in an effort to help boost America’s economy. The theory is that low interest rates boost both investment and consumption because it’s cheaper to borrow and therefore there’s less incentive to save. In December 2015, the Fed raised rates for the first time since 2006, by 0.25 percentage points, and has been slowly raising them ever since. The economy has continued to hum along just fine.
When the Fed fears the economy might be overheating or sees inflation on the rise, it can raise interest rates to slow the whole thing down. That raises the cost of borrowing for banks and, in turn, for consumers, which eventually affects spending across the economy. William McChesney Martin, who chaired the Fed for nearly two decades, famously joked that the Fed’s job is to “take away the punch bowl just as the party gets going.” To continue the metaphor, it’s like how some bars set the clock a bit fast to get everyone out the door before closing time; the Fed’s job is to cool the economy down just as things start getting fun.
The bank has a “dual mandate,” a set of goals it is supposed to achieve: maximizing employment and stabilizing prices for goods and services. In practice, that means the Fed needs to try to keep the unemployment rate low — the idea being that if borrowing costs are low, businesses will have more money to invest and expand and ultimately hire more workers — and target an inflation rate of 2 percent, because a higher inflation rate is costlier than a lower one. That’s where Amazon comes in.
“Low interest rate” Trump might want to take a step back on low-inflation Amazon
There’s a compelling argument that Amazon and other e-commerce platforms — crucially, services that let consumers compare prices — might be keeping inflation low because consumers’ new knowledge of pricing keeps a lid on what retailers can charge. Transparency, it turns out, helps manage inflation. As the Wall Street Journal recently pointed out, that’s contributing to low rates of inflation in the US, Japan, and elsewhere — and that, in turn, is complicating the Federal Reserve’s job.
The Fed is expected to continue raising interest rates next year, but Amazon’s effect on inflation might affect how much and how fast. Per the WSJ:
Most Fed policy makers agree they should keep gradually raising short-term rates in the months ahead to prevent the buoyant U.S. economy from overheating. But some are hesitant because inflation remains puzzlingly weak, running below 2 percent for most of this year. Moving too quickly could stall growth.
At a recent conference reported by Quartz, Kevin Kliesen, an economist at the Federal Reserve Bank of St. Louis, discussed the case of the “Amazon effect” on inflation, pointing to Amazon’s cheap products — whose prices force traditional retailers to keep their own products cheap to compete.
To be sure, there are other factors contributing to low inflation rates, among them an aging population, slow productivity growth, and globalization. But it’s also clear that online retailers are having a measurable effect on inflation. And that brings us back to the president.
During his campaign Trump often criticized the Fed, alleging it was keeping interest rates artificially low in an effort to prop up the Obama economy. But since taking office, the blustery billionaire has taken a liking to keeping rates down. “I do like a low-interest rate policy, I must be honest with you,” Trump said in an April interview with the Wall Street Journal. The president reportedly told outgoing Fed Chair Janet Yellen that he considered her, like himself, a “low-interest-rate” person. (Trump ultimately decided against re-nominating Yellen as Fed chair, instead opting for Jerome Powell, who is considered a moderate choice; like Yellen, Powell is expected to take a measured approach to increasing interest rates.)
In December, the Fed increased interest rates by 0.25 percentage points to a 1.25 to 1.50 percent target; in 2018, it’s projected to increase them three times. That would gradually increase the cost of borrowing for businesses and consumers and, in turn, eventually decrease consumer spending. Some economists worry it could cause a recession, but there is hardly a consensus.
In the present, things are going quite well: We’re nearing full employment — the unemployment rate is 4.1 percent — the stock market is at record highs, and the American economy is relatively strong. Amazon and its competitors appear to be doing their part by keeping inflation down, and pushing the Fed in the direction Trump wants it to go. Which makes the president’s shots at Amazon all the more baffling.
Of course, whether Trump’s take on Amazon is actually about Amazon at all is ... well, debatable. Amazon’s founder and CEO, Jeff Bezos, also happens to be the owner of the Washington Post — a fact that the president appears well aware of.
Is Fake News Washington Post being used as a lobbyist weapon against Congress to keep Politicians from looking into Amazon no-tax monopoly?— Donald J. Trump (@realDonaldTrump) July 25, 2017
E-mails show that the AmazonWashingtonPost and the FailingNewYorkTimes were reluctant to cover the Clinton/Lynch secret meeting in plane.— Donald J. Trump (@realDonaldTrump) August 8, 2017
For some context: On Friday, the day Trump fired off a tweet about how much Amazon pays the Postal Service to send packages, the Post had run a story detailing the White House’s worries for 2018, another looking at the damaging effects of his Twitter habit, and an op-ed declaring him “unfit and ignorant.”