How the Fed Affects Your Savings Account Rate

What Is the Federal Funds Rate?

The federal funds rate is the interest rate banks charge each other for overnight loans. It's the Federal Reserve's primary tool for managing the economy.

When the Fed raises rates, borrowing becomes more expensive across the economy—mortgages, car loans, credit cards. When they lower rates, borrowing becomes cheaper.

But here's what matters for savers: when rates go up, savings account APYs typically follow. When rates go down, APYs fall too.

Why Savings Rates Follow the Fed

Banks earn money by borrowing from depositors (you) and lending at higher rates. The spread between what they pay you and what they earn is their profit.

When the Fed raises rates:

• Banks can earn more on their loans and investments
• To attract deposits, they must compete by raising savings rates
• Your APY increases (eventually)

When the Fed lowers rates:

• Banks earn less on loans and investments
• They cut savings rates to maintain their profit margin
• Your APY decreases (often quickly)

The Asymmetry Problem: Fast Down, Slow Up

Here's the frustrating truth: banks are faster to cut rates than raise them.

When the Fed lowers rates:

• Banks often cut savings APYs within days or weeks
• They're eager to protect profit margins

When the Fed raises rates:

• Banks may wait weeks or months to raise APYs
• They pocket the extra earnings as long as possible
• Online banks typically move faster than traditional banks

This asymmetry is why traditional banks still pay 0.01% APY even when the Fed rate is 4.50%. They simply choose not to pass savings along to depositors.

Historical Context: The Rate Rollercoaster

The 2022-2023 rate hike cycle was the fastest in 40 years, taking rates from near-zero to over 5% in 18 months. This is why savings accounts now pay 4%+ after years of earning nearly nothing.

What Happens When Rates Drop?

The Fed has signaled potential rate cuts in 2026. Here's what that means for your savings:

Scenario: 1% Rate Cut

If the Fed cuts rates by 1% over the next year:

What You Can Do

1. Lock in rates with CDs: If you expect rates to fall, a 12-month CD at today's rates protects your earnings
2. Shop for the best rates: Some banks will cut faster than others—be ready to move
3. Don't panic: Even at 3%, you're still earning 300x more than traditional banks

Why Traditional Banks Ignore the Fed

If the Fed rate is 4.50%, why does Chase still pay 0.01%?

Because they don't have to compete.

Traditional banks have:

• Captive customers: People who've banked there for years and won't switch
• Inertia advantage: Moving money feels like a hassle
• Branch overhead: They need wider spreads to pay for physical locations

Online banks must compete on rate because they don't have branches to attract customers. That's why they actually respond to Fed changes.

Timing the Market: Should You Try?

Some savers try to "time" rate changes—moving money into CDs before cuts or waiting for hikes before committing.

Our advice: don't overthink it.

• Rate predictions are notoriously unreliable
• The difference between 3.75% and 4.00% is modest on typical savings
• Time spent earning something beats waiting for the perfect rate

The best strategy is simple: keep your money in a competitive high-yield account, and don't stress about month-to-month fluctuations.

How to Track Fed Decisions

The Federal Open Market Committee (FOMC) meets 8 times per year to set rates. Key dates are announced in advance.

After each meeting, watch for:

• Rate decision: Did they raise, cut, or hold?
• "Dot plot" projections: Where do Fed members expect rates in the future?
• Press conference language: Hints about future moves

Most banks adjust savings rates within 1-2 weeks of Fed decisions, though some move faster.

The Bottom Line

Your savings account APY is directly tied to Fed policy, but with a frustrating lag. Banks are quick to cut rates and slow to raise them.

What matters for savers:

• Use online banks: They respond to Fed changes faster
• Don't chase small rate differences: 0.1% isn't worth constant switching
• Consider CDs: Lock in rates if you expect cuts
• Avoid traditional banks: They ignore the Fed entirely

The current rate environment (4%+ APYs) is historically generous. Enjoy it while it lasts—and make sure your bank is actually passing those rates along to you.