What a Fed Rate Increase Means for Savings Accounts — And What To Do Next

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When the Federal Reserve raises interest rates, savings account interest rates typically increase, but this doesn’t happen automatically or immediately, and banks aren’t all affected equally.

Quick Take

• Fed rate increases influence but don’t directly control savings account rates.
• Online banks and high-yield savings accounts typically respond faster to rate changes than traditional brick-and-mortar banks.
• Rate changes usually appear within days to weeks at hyper-competitive banks, but can take up to three weeks at other banks.
• A 0.25% Fed rate hike might translate to $25 more per year in interest on a $10,000 balance at responsive banks.
• Your best move is to compare current high-yield savings rates and choose a bank now rather than waiting for the next Fed decision so you don’t leave money on the table. 

What Is the Fed Rate?

The federal funds rate is the interest rate that banks charge each other for overnight loans. When you hear someone say that “the Fed raised rates,” this is the change they’re talking about.

While the Fed rate changes what banks charge each other for those loans, it does not directly set your savings account rate. Instead, it sets the rate that banks use when lending money to each other, which may have a trickle-down effect and influence the rates that banks offer customers. 

The reason is simple: When the cost of borrowing money increases for banks, they can afford to pay more for deposits. Some do so, knowing that it can help them attract new customers. But it’s important to keep in mind that “can afford to” doesn’t mean “will choose to do so.” 

Do Savings Account Rates Go Up When the Fed Raises Rates? 

Savings account rates often increase when the Fed raises rates, but not always. Each bank handles rate changes differently.

When the Fed raises rates, it creates pressure on savings rates across the financial system. Banks that want to attract new customers and deposits generally increase their rates to stay competitive. They know that customers want the best bang for their buck possible when it comes to annual percentage yield (APY).

That said, timing varies. Some banks adjust their rates within days to stay competitive. Others will wait several weeks, or won’t move them at all. 

This is because competition matters more than the Fed rate policy in many cases.

• A bank that wants to increase deposits might raise rates aggressively.
• Large banks that have an extensive and loyal customer base are much less likely to do so.

It’s also important to remember that not all rate hikes are equal. A 0.25% Fed increase doesn’t automatically translate to a 0.25% increase in your APY. Banks might pass along only a portion of the increase. 

Keep In Mind

A Fed rate increase can create opportunities for higher savings yields, but you may need to actively seek out banks that pass those increases on to customers.

Why Some Banks Raise Savings Rates Faster Than Others

The speed and size of a bank’s rate increase depend on each institution’s specific situation:

• Online banks and neobanks: Online banks raise rates fastest because they compete primarily on rates compared to branch convenience. They also often have lower overhead costs to maintain.
• Traditional brick-and-mortar banks: Typically move more slowly because they have loyal customer bases who won’t necessarily leave over rate differences, and they prioritize profit margins.
• Banks with excess deposits: Don’t have an incentive to pay more since they already have the funding they need.
• Smaller banks seeking to grow: May raise rates more aggressively to attract new customers, sometimes even exceeding larger competitors. 

This is why you might see savings accounts paying 4.50% APY while your neighborhood credit union offers 0.50%. Both are legal and safe to invest in, they just have different business strategies.

What a Higher Savings Rate Actually Means for Your Money

Here’s a quick example of how rate changes can translate into actual dollars.

Imagine you have $25,000 in savings and your rate increases from 0.50% to 1.00% APY:

• Your old rate would be $125 in interest per year.
• Your new rate would be $250 in interest per year. 

Pro Tip

Want to learn how an adjustment in your savings rate could impact your bottom line? Use the GOBankingRates Savings Calculator to see for yourself. 

Should You Open or Switch Savings Accounts After a Fed Rate Increase?

You shouldn’t wait for a Fed rate increase if you want to open a high-yield savings account. Take a look at where rates are now rather than where they might go next. The best banks will stay competitive when Fed adjustments happen.

The better question is whether your current rate is competitive with what’s available now. If you have $10,000 sitting in a savings account at a credit union getting 1% interest, it would better suite you to move those funds to a high-yield account.

And when choosing a high-yield savings account, rate isn’t the only thing to keep in mind. Make sure you look for the following:

• FDIC insurance confirmation
• No monthly maintenance fees
• Easy transfers to and from checking accounts
• Reasonable minimum balance requirements
• Reliable mobile app
• Customer service quality and availability

What Happens To Savings Rates When the Fed Stops Raising — or Cuts?

It’s important to remember that savings rates are variable and can change for many reasons. If the Fed pauses rate hikes or begins cutting rates, savings yields may level off or decline. The same uncertainty that applies when rates rise also applies when they fall.

Regardless, high-yield accounts still significantly outperform traditional savings accounts. Even if a high-yield account drops from 4.50% to 3.50%, it remains far better than a traditional 0.10% rate. 

Your savings rate will fluctuate even at the best banks. That’s normal and expected, and why many people choose to invest in certificates of deposit (CDs) when they believe rates may drop soon.

How To Make the Most of Your Savings — Regardless of Fed Decisions

Get the most out of your savings regardless of what happens with the Federal Reserve with these strategies: 

• Review your current savings rate quarterly to ensure it remains competitive.
• Set up automatic transfers from checking to savings to build balances that capitalize on high interest rates. 
• Use savings accounts for emergency funds and short-term goals, not long-term wealth building.
• Don’t obsess over small rate differences, as a 0.05% difference won’t make a substantial difference. 

Key Takeaways

• The Fed influences but doesn’t directly control savings rates.
• Savings rates are variable, and will fluctuate regardless of Fed policy.  
• Online banks and high-yield accounts typically respond faster than traditional banks to Fed changes. 
• Rate increases usually appear within one to three weeks at competitive banks, but many will barely adjust their APYs. 
• Focus on current competitive rates rather than waiting for the next Fed decision if you don’t already have a high-yield savings account.

Jennifer Taylor contributed to the reporting for this article.

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