How Do Banks and the Federal Reserve Affect Savings Account Rates?

If fluctuating interest rates on savings accounts have ever perplexed you, you’ll want to make a point to direct your confusion to your bank and the Federal Reserve as they both control them. But how exactly do they control them? Let’s take a closer look at the relationship between banks, the Federal Reserve, and savings account rates.

What is the Federal Reserve?

The Federal Reserve is a central bank for the United States that controls the country’s money supply. Its main functions include printing and releasing new bank notes, removing those notes that are currently in circulation, and adjusting base interest rates. This means that the Federal Reserve takes on the responsibility of fluctuating interest rates to help maintain the country’s financial stability.

Banks, the Federal Reserve, and Savings Accounts

Now that you know what the Federal Reserve is and how it controls rates, you can better imagine how banks also control them. Basically, the banks look at what the Federal Reserve is doing because it has an overall handle on the health of the economy. If the Federal Reserve lowers rates on savings accounts, banks usually will too. They are typically not required to go as low, but they can.

In times where you see fluctuating interest rates, yet some banks don’t lower theirs – especially online banks – they may have decided that they can afford to offer bigger returns. In general, online banks offer higher returns than brick-and-mortar banks because they don’t have the same overhead costs to worry about.

Because it is the Federal Reserve, as well as your individual bank, that is responsible for fluctuating interest rates, it is up to you to decide which bank you want to choose that will give you the best returns on your savings accounts.

About the Author

Stacey Bumpus holds both her Bachelor and Masters degrees in Communications. After spending years in corporate communications, she discovered freelancing was really her cup of tea and fell in love with finding and writing about the latest financial news. Now, providing news and tips about banking, mortgages, taxes (and even logging her own efforts to save for retirement), she’s not only fulfilling her lifelong passion, but also helping others manage their finances responsibly.