In the old days, America’s working folks, the once great and sprawling middle class, had a strategy for “getting ahead” and achieving the American Dream. At the center of that strategy was saving their hard-won wages in commercial banks. Sounds crazy, right? But depositing one’s money in a bank wasn’t just some way to preserve one’s wealth for the future because, back in the old days, commercial banks actually paid decent interest, and sometimes handsomely. For instance, in the 1980s banks were paying double-digit interest rates to their depositors. And as late as 2000, one could get close to 7.0 percent on a certificate of deposit. So, one’s money made money. Over the last couple of decades, that’s all been shot to hell.

Nowadays, the banks pay hardly any interest. Some are paying interest at the princely rate of 0.01 percent for savings accounts. Abysmal rates have been the norm since the 9/11 terrorist attacks in 2001. And just when rates started to inch up a bit, the 2008 financial crisis or the 2020 pandemic hit and interest rates for savers again took a nosedive.

But the situation for working folks is worse than the fact that their money isn’t making any money to speak of by way of interest. That’s because their deposits have been losing value, buying power, due to inflation.

Inflation has been called a “tax,” and an especially cruel one for working folks. But when inflation is engineered, and the direct result of deliberate government policy, inflation might just as well be regarded as theft. And at the center of this policy (of theft) is America’s central bank, the Federal Reserve.

One of the Federal Reserve’s mandates is to guarantee price stability and thereby preserve the value of the U.S. dollar. But the Fed tries to engineer an ongoing inflation rate of 2 percent. Why is the Fed’s 2 percent inflation rate policy acceptable? After all, doesn’t money lose value at any inflation rate?

The Fed’s targeted 2 percent inflation rate rests on the belief that economists can control the economy. We may soon get to see if that’s true because the inflation rate is now 7.5 percent. That means the money in your bank account is losing 7.5 percent of its value this year. The Fed’s main duty right now should be to get inflation down and to do it quickly. Unfortunately, that is complicated by the Fed having another mandate.

The Fed’s so-called “dual mandate” needs to be changed. In these pages, this writer has urged that the Fed’s other mandate of maximizing employment be stripped from the Fed. That mandate is at odds with the mandate to maintain price stability, (not to mention also being at odds with Congress paying people not to work during the pandemic).

The Fed actually has a third mandate. The third mandate may not have any statutory foundation nor get much press, but it is no less real. The Fed’s third mandate is to create whatever money Congress wants. Sometimes the Fed’s money creation is justified, such as during the 2008 financial crisis when the Fed provided urgently needed liquidity with TARP.

But the Fed didn’t stop with TARP. For long after the Great Recession ended in 2009, the Fed kept on creating additional trillions of dollars through QE, its quantitative easing programs. And during the pandemic, the Fed has been purchasing about half of the Treasury’s new securities. When the Fed does these things, it creates new money, and expands the money supply, creating actual textbook inflation.

To head off price inflation, the Fed has signaled a reversal of policy entailing “tapering” of its money creation and in March the hiking of its key interest rate. It was even rumored that the Fed’s first rate hike might be 50 basis points. But then Russia started a war with Ukraine. At Barron’s on Feb. 24, one reads:

The capital markets typically react more vigorously to a surprise than an anticipated development. Russia’s invasion of Ukraine was telegraphed, and yet the market has reacted like it was a bolt from the blue. Russia’s initial preparations spurred little market reaction outside of Ukraine and Russian bonds. It wasn’t until two weeks ago, when the U.S. warned a Russian invasion could “begin at any time,” did it become much of a market force.

Until then, the dominant theme had been the anticipation of the Federal Reserve’s rate hike next month, and tighter monetary policy more broadly. As recently as Feb. 10, the fed-funds futures had discounted an 80% chance that the Fed would hike 50 basis points to kick off its monetary adjustment cycle. The odds now are less than 20%.

Perhaps the perception that the Fed won’t be quite as aggressive in hiking its federal funds rate as had been thought may be why the U.S. equity market rallied so smartly on Friday the 25th. The concern for inflation hawks is that sagging prices in stocks or real estate, or the advent of a recession, or a wider war, or something, could derail the Fed’s plans to start dealing with inflation.

Fighting inflation should be the Fed’s only war. The Fed should leave other problems, like full employment, to Congress. But the Fed is the poodle of Congress, and Congress wants the Fed to use its monetary policy of money creation and zero percent interest rates because raising taxes to pay for all their new spending programs will put them in bad odor with the taxpayers.

Congress and its poodle have destroyed the time-honored traditional means working folks have used to prosper and grab a bit of the American Dream, which is saving money in banks. Through their acceptance of absurdly low-interest rates, savers have paid for the recovery and pandemic response, while the Fed’s pumping up of the money supply has inflated the stock and real estate markets, which are now grossly overvalued. The Fed has been picking winners and losers. But now the Fed’s policies have finally resulted in inflation at a 40-year high.

Inflation is the destroyer of currencies, and it can be the destroyer of nations. The Fed needs to focus only on reducing inflation, and that may mean resisting Congress. The Fed is supposed to be independent, not some compliant obedient lapdog that gives Congress everything it wants.

Interest rates for depositors in the nation’s banks need to rise. If the Fed’s 2 percent inflation is really as healthy as the Fed seems to think it is, then commercial banks should be required to offer accounts that mirror that inflation rate. Any commercial bank that cannot pay the inflation rate on a one-year certificate of deposit probably shouldn’t exist.

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.

Image: Federal Reserve