Monetary Policy

A More Hawkish Federal Reserve — and Federal Trade Commission

Federal Reserve Chairman Jerome Powell testifies during a Senate Banking Committee hearing on Capitol Hill in Washington, D.C., December 1, 2020. (Susan Walsh/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: the Fed’s surprising hawkishness, the FTC’s new trustbuster, the anti-Amazon industry, and an evaluation of Congress’s recent antitrust proposals. To sign up for the Capital Note, follow this link.

The Fed Delivers a Surprise
For the first time since the start of the COVID-19 pandemic, the Federal Reserve has bucked investor expectations and taken a more hawkish policy stance. After months of projecting near-zero interest rates through 2023, yesterday the Federal Open Market Committee forecast two rate hikes by the end of 2023. With consumer prices and spending rising in tandem of late, the revised projections are a tacit admission that recent inflation may not be as transitory as the Fed has maintained.

“Is there a risk that inflation will be higher than we think? Yes,” said chair Jay Powell. The ten-year Treasury yield increased roughly 80 basis points to 1.57 percent after the press conference.

But the Fed’s revised policy outlook was not matched by an increased medium-term inflation forecast. The central bank continues to expect an average inflation rate of 2.1 percent over the next three years. Goldman Sachs’s macro researchers interpret that to mean that “the FOMC sees the 2021 inflation overshoot, which will bring the average inflation rate since the recession began above 2 percent, as largely sufficient to accomplish its averaging goal.”

Ever since the Fed adopted an average inflation target last summer, markets have been left guessing as to the time horizon over which the Fed would target 2 percent. Yesterday’s projections suggest it will be two to three years.

While the Fed’s more-hawkish guidance should assuage fears of runaway inflation, Wall Street still expects a meaningful pick up in the CPI for the foreseeable future. That poses a challenge for asset allocators, as AllianceBernstein CEO Seth Bernstein outlined in a Financial Times op-ed:

As yields have moved down in recent years, the duration of high-grade bonds has increased — i.e. they have become more sensitive to changes in yields as even small moves at lower levels can have an outsize impact on how long it takes an investor to get their money back. Thus, bond investors are more exposed now if interest rates rise.

So far, simple cross-asset portfolios, such as those that use a 60:40 allocation for bonds and equities have been shielded from this. This is because these asset classes have had negative correlation in recent decades — when equities suffered, bonds have rallied and vice versa. If inflation rises strongly, this is less likely to be the case. At moderate levels of inflation, bonds would sell off but equities would be more resilient as earnings would rise. But at higher levels of inflation, both equities and bonds would suffer from the prospect of interest rate rises.

In other words, investors will have to come up with new ways of hedging against inflation.

Biden’s Big Tech Hawks
Elsewhere in the policy world, the Biden administration has finalized it staffing of the Federal Trade Commission with the appointment of 32-year-old law professor Lina Khan as FTC chair. The Financial Times observes:

Biden’s decision to appoint Khan to chair the FTC — making her one of the youngest-ever heads of a federal agency — sends a signal of his administration’s intent to take a more aggressive stance towards Big Tech.

“This is the equivalent of an activist outsider suddenly becoming chairman of the board. And none of them saw it coming. None of them,” Kovacic added. “Their life just got much more difficult, and much more precarious.”

Khan rose to prominence after authoring a 2017 note in the Yale Law Journal titled “Amazon’s Antitrust Paradox.” In the essay, then–law-student Khan argues against an antitrust jurisprudence that pegs “competition to ‘consumer welfare,’ defined as short-term price effects” (emphasis mine). The premise of the paper is that while Amazon’s low prices may benefit consumers in the short run, in the long run, they give the company problematic power.

Rather than focus on consumer welfare, Khan argues that antitrust regulators should look to “market structure,” by which she seems to mean market concentration. Despite demonstrably improving consumer welfare, Amazon’s dominance of e-commerce poses a threat, argues Khan, because “monopolistic and oligopolistic firms have greater bargaining power against consumers, suppliers, and workers, which enables them to hike prices and degrade service and quality while maintaining profits.”

The essay merits a more-thorough evaluation than I can fit in this newsletter, but I will note that nearly 30 years after its founding, Amazon’s “bargaining power” against consumers has yet to lead to price increases, nor does its firmwide minimum wage of $15 an hour suggest monopoly abuse of workers. Indeed, Amazon ranks among the most voracious hirers in the country, adding 500,000 workers in 2020 alone.

Meanwhile, a cottage industry of Amazon competitors has cropped up in the past few years. A story in yesterday’s Wall Street Journal highlights the growing number of businesses “positioning themselves as anti-Amazons”: pools inventories from local businesses to create a local version of the “everything store” that Amazon is known for, thanks to the vast selection and lightning-speed delivery that founder Jeff Bezos made central pillars of the Seattle company’s strategy.’s marketing is unsubtle: social-media campaigns carry slogans such as “Shop Boroughs, Not Bezo$” and “An ‘everything store’ that delivers faster than Amazon.”

Shopify, which helps smaller brands and retailers — including — set up online, is something of a standard-bearer for the retail uprising. Chief Executive Tobias Lütke once quipped that “Amazon is trying to build an empire, and Shopify is trying to arm the rebels.” Its revenue doubled in the year through March, to $3.4 billion.

Elsewhere, start-up Instacart has stalled Amazon’s push into grocery deliveries, and legacy retailers are catching up to Amazon in the lucrative advertising business. A May report from the Boston Consulting Group highlighted the growing field of Retail Media, in which vendors such as Kroger and Target sell ad space on their websites. This shift in the ad industry is driven in part by companies’ explicitly attempting to reduce Amazon’s growing market share:

If the prospect of a new high-margin revenue stream (as much as 80%, compared with the typical in-store margin of 10% to 20%) is not a sufficient incentive, some retailers will also want to think about the need to protect existing trade and co-op dollars. In recent years, as brands have benefited from the relative transparency of digital marketing, the trade and co-op category has been facing pushback. Retail media is a way for retailers to hold on to this spending and tighten relationships with the companies whose brands they sell.

Around the Web
Podcaster Harry Stebbings raised a $140 million venture-capital fund

A 24-year-old law degree dropout from south-west London who as a teenager started a popular podcast about tech investing has raised $140m in new funds to back start-ups.

Harry Stebbings has secured investment from the Massachusetts Institute of Technology and Rothschild-backed RIT Capital Partners, as well as the founders and early backers of Spotify, Calm and Atlassian, for his 20VC fund.

Google’s new cohort-based tracking tool is running into trouble

Amazon is blocking Google’s controversial cookieless tracking and targeting method.

Most of Amazon’s properties including, and are preventing Google’s tracking system FLoC — or Federated Learning of Cohorts — from gathering valuable data reflecting the products people research in Amazon’s vast e-commerce universe, according to website code analyzed by Digiday and three technology experts who helped Digiday review the code.

As Google’s system gathers data about people’s web travels to inform how it categorizes them, Amazon’s under-the-radar move could not only be a significant blow to Google’s mission to guide the future of digital ad tracking after cookies die — it could give Amazon a leg up in its own efforts to sell advertising across what’s left of the open web.

Random Walk
Investor and tech blogger Benedict Evans wrote a succinct overview of the antitrust measures recently proposed by Congress:

The five bills, with their aims, are as follows:

  1. Merger Filing Fee Modernisation Act: raising funds to pay for more rigorous antitrust enforcement
  2. Access Act: user data portability
  3. American Choice and Innovation Online Act: steering and self-preferencing of services
  4. Ending Platform Monopolies Act: bundling, private label, and platform companies competing with services on their platforms
  5. Platform Competition and Opportunity Act: a ban on all M&A

Bills 2 to 5 apply to companies that are a ‘covered platform’, which is defined as a company that has either net revenue or market cap of at least $600bn and either 50m US consumer MAUs or 100k US business MAUs.*

Collectively, these bills are a catalogue of most of the major arguments made against large consumer tech companies in the last few years, and of the remedies that have been proposed. Unfortunately, some of them also show little sign that their authors have engaged with or even read any of the discussion we’ve all had around those ideas.

The reasonable:

Steering, self-preferencing and competing on your platform. Google puts its own restaurant data above Yelp in search results, Apple bans Spotify from asking for a credit card or even telling you that’s an option, and Amazon makes private label products that compete with its suppliers. Platforms compete with other people on their own platform. This is a problem, so we should ban it, right? Well, yes and no.

Two of the laws proposed on Friday address these questions (“American Choice’ and ‘Ending Platform Monopolies’). The first is aimed narrowly and specifically at self-preferencing and steering. Apple could no longer require apps to use in-app payment or ban them from offering a credit card sign-up, and Amazon would be banned from favouring its own products over third parties’ in the store. The EU has already made simular decisions, and I’ve written elsewhere (starting in 2011!) that I think Apple’s position on in-app payment and customer communication is a problem.

The less-reasonable:

Unfortunately, the ‘Ending Platform Monopolies’ law is impossibly broad. Google, Apple, Facebook, Amazon and Microsoft would be banned from doing anything on their platforms that anyone else might do, and from anything that might be a conflict of interest. They would not just be banned from favouring their own products – they’d be banned from having any products at all that they could theoretically favour.

This of course comes from a framing that ‘if you own a platform you can’t compete on it’ – Apple or Google should not have any products or features that compete with companies on their platforms. That sounds very clear – Elizabeth Warren made it a mantra. But what if I want to sell a camera app for your iPhone? OK, so Apple can’t include a camera app – or a clock, or an email app, or indeed a user interface or a file system. An Android phone has its own TCP/IP stack (in the 90s Windows did not, and you had to buy one), but other people would like to sell you that if it wasn’t there, so that’s a clear conflict of interest and has to go.

There’s a very basic misunderstanding at play here – you can’t ban a platform from having ‘any’ feature, service or product that someone else might want to make, because that describes literally every single thing that a platform does. There is, to repeat, a very real problem here – this was the whole Microsoft/Netscape case. You can certainly carve out specific issues, such as Apple Music, or private label on Amazon, though as I wrote here, worrying about private label is a pretty irrational moral panic. But, you’ll need to spend a lot more time thinking about how this stuff works and what the word ‘platform’ really means, because this law wouldn’t just ban Apple Music and Google Maps – it would ban iOS and Android.

— D.T.

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