How the Fed rate affects your savings: What to expect from every type of bank account

The Federal Reserve’s interest rate decisions affect how much you earn from your savings accounts, CDs and money market accounts. When the Fed raises its benchmark rate, savings rates normally follow, but with a delay and often not dollar-for-dollar. On the other hand, banks typically lower savings rates in anticipation of a Federal Reserve rate cut or shortly after one is announced.

But the Fed’s rate decisions aren’t the only factor that impacts your savings — the type of bank and account you have also play a key role. Most traditional banks barely respond to Fed changes, while many online banks and credit unions move more aggressively to stay competitive. That’s why you can generally earn higher interest at these digital and local institutions.

Here’s how the Fed’s policy affects your savings, and how to use each Fed decision to maximize your earnings in any rate environment.

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How does the Federal Reserve affect what you earn on your savings?

The Federal Reserve doesn’t directly set what banks pay on savings accounts, CDs or money market accounts. Instead, the Fed announces a target range for the federal funds rate — the rate banks charge each other for overnight loans. These target ranges come from the Federal Open Market Committee (FOMC), which meets eight times per year to evaluate economic conditions and determine whether to raise, lower or maintain current rates.

The Fed can’t control this rate directly, but it uses various tools to nudge the actual rate toward its preferred range. For example, the Fed can adjust the interest it pays banks for parking money with it. Banks then use this benchmark to help determine what they pay their clients, though they’re not required to pass along the interest they earn.

That’s why changes to the Fed rate typically affect only certain types of accounts and banks. If you have a traditional savings account at a large bank, you’ll likely see little to no change regardless of Fed decisions. But if you keep your savings in a high-yield account or other variable-rate products, Fed movements can impact your earnings within weeks.

Why banks follow the Fed’s lead (most of the time)

Banks don’t have to copy the Fed’s rate changes, but they usually do for practical reasons. When the Fed raises rates, it becomes more expensive for banks to borrow money from each other overnight. Banks typically pass this increased cost along by raising the rates they charge customers for loans and credit cards.

To balance this out, banks often increase what they pay on deposits, though usually not by the same amount. They want to keep customers happy and maintain a reasonable relationship between what they pay out and what they earn.

Online banks typically move fastest, often updating rates within a few days to two weeks after Fed announcements. Traditional banks move much slower, sometimes taking weeks or months to make changes, if they do at all.

Additionally, banks tend to cut rates faster than they raise them, so you might see decreases within days but wait weeks for increases. This timing difference explains why shopping around becomes especially important after Fed rate changes.

How banks decide what to pay on your savings

Banks don’t automatically adjust savings rates when the Fed moves. Instead, they balance multiple factors, including:

• Need for deposits. Banks that want more customer money offer higher rates to attract it, while banks with plenty of cash typically keep rates low.

• Competitive pressure. When other banks start offering better rates, banks often feel pressure to match those offers or risk losing their customers.

• Overhead costs. Traditional banks spend a lot of money on rent, staff and large branch networks, so they normally keep savings rates low to cover these expenses. Online banks skip the physical locations and pass those savings to customers through higher rates.

• Customer acquisition. Some banks use attractive rates as their main sales pitch to win over new customers, especially since a good rate often matters more than fancy branch locations or free pens.

• Brand positioning. Some banks use high rates to build their reputation as the “good guys” who actually care about helping customers earn money, setting themselves apart from banks known for nickel-and-diming people.

Learn more: The biggest winners and losers of the Federal Reserve’s decisions

How rate changes affect different types of bank accounts

The impact of Fed decisions varies depending on what type of account you have. Unlike student loans where federal rates follow specific formulas, bank account responses depend on individual bank policies and account structures.

1. High-yield savings accounts (HYSAs)

High-yield savings accounts react the most to Fed changes since these accounts use competitive rates as their main selling point. When the Fed raises rates, you’ll typically see your high-yield savings rate increase within days to weeks. Online banks Bread Financial, CIT Bank and SoFi often lead the charge, bumping their rates to stay competitive and attract new customers.

The downside is that these accounts drop just as quickly or even faster when the Fed cuts rates. Still, even when rates fall, high-yield savings accounts usually maintain a major advantage over traditional savings accounts, making them worth keeping for most savers.

2. Money market accounts (MMAs)

Money market accounts react similarly to high-yield savings accounts. You’ll see the same quick adjustments up and down following Fed moves, with competitive institutions leading the way. The main difference comes in account features like limited check-writing privileges and higher minimum balance requirements, not how they respond to rate changes.

These accounts often sit in the sweet spot between savings and checking accounts, offering competitive rates while providing some transaction flexibility. However, don’t expect the additional features to shield you from rate decreases — when the Fed cuts rates, money market accounts typically follow high-yield savings accounts down the ladder just as quickly.

3. Checking accounts

Most checking accounts don’t offer meaningful interest rates, so they don’t change much when the Fed moves rates. However, a few high-yield checking accounts exist, but they’re uncommon and may come with some requirements.

For example, Consumers Credit Union Free Rewards Checking offers attractive rates but requires meeting monthly transaction requirements. SoFi Checking and CIT Bank eChecking offer modest yields, but most people would be better off keeping their funds in one of the savings accounts these banks offer.

4. Cash management accounts

Cash management accounts from investment firms like Fidelity or Wealthfront often track money market fund rates, which follow Fed changes. These accounts frequently offer some of the most competitive rates and adjust relatively quickly to market changes. Investment firms use attractive cash rates to keep your money in their ecosystem while you decide where to invest it.

Cash management accounts typically combine checking and savings account functions into one product, letting you earn competitive interest while still having access to features like debit cards, check-writing and ATM access. These accounts can be attractive during rising rate periods, but quickly drop their yields after a Fed rate cut.

5. Certificates of deposit (CDs)

Certificates of deposit work differently since they lock in rates for specific terms, ranging from a few months to several years. Your existing CDs keep their original rates regardless of what the Fed does. For example, a two-year CD you bought last year at 4.50% APY will stay at that rate even if rates fall. This protection works both ways, though — if rates rise, you can either keep your lower rate until maturity or break your CD and pay an early withdrawal fee.

New CD rates track Fed changes more closely than most other bank products, though you’ll want to shop around since traditional banks often lag behind with their CD offerings. Online banks like Barclays, Discover and Valley Bank typically offer much better rates and adjust their CD rates soon after Fed announcements.

A CD ladder can help you navigate these rate changes by spreading your money across CDs with different maturity dates — say, splitting $15,000 across three CDs maturing in six, 12 and 18 months. This way, you’re regularly getting money back to reinvest at current rates, whether they’ve gone up or down. Some institutions, such as CIT Bank, even offer no-penalty CDs that let you withdraw early without paying fees, giving you more flexibility than traditional CDs.

6. Traditional savings accounts

Traditional savings accounts at large banks show little reaction to Fed rate changes. These banks often keep rates extremely low regardless of what the Fed does, focusing on customer convenience and brand recognition rather than competitive yields. You might see no change at all even after significant Fed moves, which means your money earns practically nothing.

The disconnect happens because large banks like Chase, Bank of America and Wells Fargo don’t need to compete aggressively for deposits. They have massive customer bases that prioritize convenience over returns, so they can get away with paying rates as low as 0.01% APY on savings. That’s why if you’re serious about earning money on your cash, traditional savings accounts at big banks rarely make sense in any rate environment.

What Fed changes actually mean for your wallet

Most of the time, one or two Fed rate decisions won’t dramatically impact your monthly interest earnings unless you have substantial balances in high-yield accounts.

Let’s say you have $10,000 in a high-yield savings account earning 4.00% APY. When the Federal Reserve increases rates by 0.25%, competitive banks typically raise their rates by about 0.15% to 0.20%. Your new rate might hit 4.15%, increasing your annual earnings from $400 to $415.

Now scale that up: If you have $50,000 in the same account, that 0.15% rate increase would bump your annual earnings from $2,000 to $2,075 — an extra $75 per year, or about $6 more each month. Still not a massive difference, but enough to matter.

The impact becomes more meaningful with bigger Fed moves and larger balances. Here’s how different Fed rate changes might affect a $100,000 balance:

What to do with your savings after a Fed rate decision

Most of the time, a single Fed rate change shouldn’t cause you to completely overhaul your savings strategy. However, there are situations where Fed trends may signal it’s time to take action with your money.

When the Fed rate is trending up

If the Fed rate is trending upward with multiple increases expected, this could be a good time to evaluate your current savings setup. You might want to move money from low-yielding traditional accounts to high-yield alternatives that will capture rate increases.

For CDs, timing becomes important. You might want to avoid long-term CDs early in a rate-hiking cycle, since new CDs will likely offer better rates as the Fed continues raising rates. Consider shorter-term CDs or high-yield savings that can adjust upward.

When the Fed rate is trending down

If the Fed rate is trending downward, you might want to lock in current attractive rates with CDs before they decline further. This is especially valuable if you have money you won’t need for specific periods.

High-yield savings accounts will likely see their rates decline as the Fed cuts continue, but they still typically offer better returns than traditional accounts even in falling rate environments. That’s why traditional savings account holders should consider switching regardless of Fed direction.

Keep in mind that while lower savings rates reduce your earning power, Fed rate cuts typically signal broader economic support that can benefit other areas of your financial life. Lower rates often mean lower borrowing rates for mortgages, personal loans and other forms of credit.

Learn more: I’m a finance expert: Here’s why it’s still worth opening a high-yield savings account

Smart moves to make in any rate environment

The most important strategy for optimizing your cash returns is ensuring you’re earning competitive rates on your deposits. Make it a habit to check your savings account rates quarterly and compare them to current market offerings.

When comparing savings options, focus on the annual percentage yield (APY) rather than the interest rate, as APY includes the effect of compounding. Also, pay attention to minimum balance requirements, fees and customer reviews for any potential red flags.

Online banks typically offer the highest yields, but make sure you’re comfortable with digital-only banking before making the switch. And don’t forget to verify that any institution you’re considering is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). Both organizations protect your deposits up to $250,000 per institution.

More stories in our Federal Reserve and money series

FAQs: The Fed and your savings

Find out more about how the Fed rates influence your savings. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.

What’s the difference between the Fed rate and interest rates?

The Fed rate, officially the federal funds rate, is the target interest rate that the Federal Reserve sets for banks to charge each other for overnight loans. The Fed rate functions as the baseline that influences all other rates in the economy. Interest rates, on the other hand, are what you actually pay or earn on financial products like savings accounts, loans or CDs. When the Fed raises or lowers this rate, it creates a ripple effect that eventually reaches the interest rates you see on your bank accounts.

Does the Fed rate affect CD rates?

Yes, Fed rate changes affect CD rates, but only for new CDs you purchase after the rate change. If you already have a CD, your rate stays locked in for the entire term, regardless of what the Fed does. When the Fed raises rates, banks typically offer higher rates on new CDs to stay competitive. When rates fall, new CD rates drop accordingly. This is why timing can matter with CDs — you might want to avoid locking in long-term rates if you expect the Fed to keep raising rates, or conversely, lock in attractive rates if you think cuts are coming.

What does the Federal Reserve do?

The Federal Reserve, often called “the Fed,” is the central bank of the United States. Its main job is to keep the economy stable by controlling inflation and supporting employment through monetary policy. The Fed’s primary tool is adjusting the federal funds rate to either stimulate economic growth by lowering rates to make borrowing cheaper or cool down an overheating economy by raising rates to make borrowing more expensive. While this might seem removed from your daily life, these decisions reflect on everything, including mortgage rates, credit card rates and savings account earnings.

About the writer

Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia’s expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.

Article edited by Kelly Suzan Waggoner

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