When the Federal Reserve raises its target interest rate, savings account rates at competitive banks rise — usually within a few weeks. When the Fed cuts rates, savings APYs fall, often faster than they rose. The Fed doesn’t set your savings rate directly, but it’s the most powerful force behind it.
The current Fed funds target rate is approximately 4.25%–4.50% (May 2026). This supports top savings APYs of 4.20%–4.90% at online banks.
How the Transmission Mechanism Works
The Fed sets the federal funds rate — the rate banks pay each other for overnight borrowing. Here’s how that flows to your savings account:
Fed Funds Rate
↓
Banks' cost of borrowing from each other
↓
Banks' decision: borrow from Fed/other banks OR attract deposits?
↓
Deposit rates offered to customers
When the Fed rate rises:
- It costs banks more to borrow from each other
- Deposits (your money) become a cheaper alternative source of funds
- Banks compete for deposits by offering higher APYs
- Your savings account earns more
When the Fed rate falls:
- Borrowing from other banks becomes cheaper
- Banks don’t need to compete as hard for deposits
- Banks lower deposit rates
- Your savings account earns less
How Much of the Fed Rate Do Banks Pass Through?
Not all banks pass through Fed rate changes equally. Research consistently shows a wide gap:
| Bank Type | Rate Pass-Through (Hikes) | Rate Pass-Through (Cuts) |
|---|---|---|
| Online HYSA banks | 70–90% | 70–90% |
| Credit unions | 50–75% | 60–80% |
| Regional banks | 20–50% | 50–70% |
| Big traditional banks (Chase, BofA, WF) | 5–15% | 80–100% |
Big banks are asymmetric: They’re slow to raise deposit rates when the Fed hikes but quick to cut them when the Fed reduces rates. Online banks like Ally, Discover, and Marcus pass through more of each move in both directions.
Worked example using 2022–2024 data:
- Fed raised rates from 0.25% to 5.25–5.50% (+525 basis points)
- Ally Bank raised savings APY from 0.50% to 4.85% (+435 basis points, 83% pass-through)
- Chase Savings went from 0.01% to 0.01%–0.02% (+1 basis point, near-zero pass-through)
The Fed Meeting Calendar and Rate Decisions
The Federal Open Market Committee (FOMC) meets 8 times per year — roughly every 6–8 weeks. After each meeting, they announce any rate changes. Watch these dates if you’re monitoring savings rates.
2026 FOMC meeting dates (approximate):
- January 28–29
- March 18–19
- April 29–30
- June 10–11
- July 29–30
- September 16–17
- October 28–29
- December 9–10
Savings rates at online banks typically adjust within 1–3 weeks of each FOMC announcement.
Rate Hike Cycles vs. Savings Rates
| Fed Hike Cycle | Rate Change | Effect on Best Savings Rates |
|---|---|---|
| 2004–2006 | 1.0% → 5.25% | Savings rose from ~1.5% to ~5% |
| 2015–2018 | 0.25% → 2.5% | Savings rose slowly: from 0.06% to ~2.2% |
| 2022–2023 | 0.25% → 5.5% | Savings surged quickly: from 0.06% to 5.25% |
The 2022–2023 cycle was unusual in speed and magnitude. Online banks passed through the increases almost in real time, creating a brief golden era for savers.
Rate Cut Cycles and What Happened to Savings
| Fed Cut Cycle | Rate Change | Effect on Best Savings Rates |
|---|---|---|
| 2001 | 6.5% → 1.0% | Savings fell from ~4.5% to ~1.5% |
| 2007–2008 | 5.25% → 0.25% | Savings fell from ~4.5% to ~0.5% |
| 2019–2020 | 2.5% → 0% | Savings fell from ~2.2% to ~0.5% |
| 2024–2025 | 5.5% → ~4.25% | Savings declined from ~5.2% to ~4.2% |
Each cut cycle reduced savings rates — but online banks retained higher rates than traditional banks through each cycle because competitive pressure remained.
What This Means for Your Savings Strategy
If you expect rates to stay flat or rise: A high-yield savings account gives you flexibility and a competitive rate without locking in funds.
If you expect the Fed to cut rates: Consider locking in a 1-year or 2-year CD at current rates before they decline further. A 1-year CD at 4.75% beats a savings account at 4.20% and protects you from one year of rate cuts.
Hedge with both: A CD ladder — depositing equal amounts in 1-year, 2-year, and 3-year CDs — lets you earn competitive rates while maintaining partial liquidity as each CD matures.
See also: Savings account rate history 1980–2026 | CD rates 2026 | Prime rate 2026 | Best high-yield savings accounts
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