The fox is inside the henhouse now.
Kidding aside, doesn't this seem like exactly the sort of move you would want your government agencies to make? Take advantage of free-market services where appropriate, and not get all "NIH"?
What do you mean by this? I did not get this reference.
So not exactly NIH unless your claiming that Tommy Flowers etal at the Post Office and Bletchly park invented this
Furthermore, while I'm acting mostly on assumption here, I doubt the agency is going to Amazon because they can't build and/or afford their own setup.
I can build and I can afford my own versions of a great many things. I still buy from vendors.
Anyway, AWS is heavily segregated. Simply having consumer instances is not going to enable them to snoop your traffic, and simply having consumer instances is not going to enable them to make Amazon give them your traffic if they couldn't make Amazon give it to them before.