Banks start with the Federal Reserve's rate, then subtract their own costs and profit margin

The interest rate your bank offers on a savings account begins with a number set by the Federal Reserve: the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed raises or lowers this rate, banks adjust the rates they offer to customers within days or weeks. But the Fed's rate is only the starting point. Your bank then looks at how much it costs to run the account, how much profit it needs to make, and how much competition it faces from other banks offering similar accounts.

A bank's savings rate is almost always lower than the Fed's rate. If the federal funds rate is 5.25 percent, your bank might offer 4.50 percent on a high-yield savings account or 0.01 percent on a basic savings account. The difference—called the spread—is where the bank makes money. The larger the spread, the more the bank keeps for itself.

Key Takeaways

  • The Federal Reserve's interest rate is the foundation for all bank savings rates, and changes to it ripple through the market within one to four weeks.
  • Banks subtract their operating costs, funding costs, and desired profit margin from the Fed's rate to arrive at what they pay you.
  • Banks with lower overhead costs—online-only banks, for example—can afford to pay higher rates because they keep a smaller spread.
  • Competition between banks forces rates up; when few banks compete in your area or product type, rates tend to stay low.
  • The rate you see advertised is the bank's current offer, but it can change at any time without notice, even on existing balances.

The Federal Reserve's rate is the floor, not the ceiling

The Federal Reserve does not set the exact rate your bank pays. Instead, it sets a target range for the federal funds rate—currently between 5.25 and 5.50 percent, though this changes several times per year. This is the rate banks charge each other when they need to borrow money overnight to meet regulatory requirements.

When the Fed raises its target range, banks have to pay more to borrow from each other, so they raise the rates they pay depositors to attract and keep savings. When the Fed cuts its target range, banks lower the rates they offer. The lag is usually one to four weeks. A bank might wait to see whether the Fed's move is temporary or permanent before changing its own rates, or it might move quickly to stay competitive.

The Fed's rate acts as a ceiling on what banks can sustainably pay. If the Fed's rate is 5.25 percent and a bank pays you 5.00 percent, the bank is keeping only 0.25 percent as spread. That is tight but workable for a large bank with low costs. A bank paying 5.50 percent when the Fed's rate is 5.25 percent would be losing money and cannot do it for long.

Operating costs and funding costs determine the spread

Every bank has to pay for branches, staff, technology, insurance, and regulatory compliance. These are called operating costs. A bank also has to pay for the money it lends out—it borrows from depositors (you) at one rate and lends to borrowers at a higher rate. The difference between what it pays depositors and what it charges borrowers is how it covers costs and makes profit.

An online-only bank like Marcus or Ally has almost no branch costs and fewer staff per dollar of deposits. It can afford to pay 4.50 percent on savings because its operating costs are low. A traditional bank with hundreds of branches, thousands of employees, and legacy computer systems might pay only 0.50 percent on the same account, because it needs a much larger spread to cover its expenses.

Banks also have to hold a portion of deposits in reserve—money they cannot lend out—to meet Federal Reserve requirements. This reserve requirement varies but is typically around 10 percent for large banks. If a bank holds 10 percent in reserve and pays you 4.50 percent on that money, it is losing money on that portion. The bank compensates by keeping a larger spread on the money it does lend out.

Competition forces rates up when banks need deposits

When banks have plenty of deposits and do not need more money to lend, they lower the rates they offer. When banks need deposits—because they are making more loans than they have money for—they raise rates to attract savers. This is why high-yield savings accounts pay significantly more than basic savings accounts: banks are competing hard for deposits in that product category.

Geographic and product competition matters. In a city where five banks all offer savings accounts, rates tend to be higher than in a rural area where one bank dominates. Online banks have forced traditional banks to raise rates on savings accounts because savers can move money when ready to an online account that pays more. A bank offering 0.01 percent on savings loses customers to a bank offering 4.50 percent, so it eventually raises its rate or loses deposits.

Banks also compete for different types of customers. A bank might pay very low rates on basic savings accounts (targeting customers who do not shop around) but high rates on money market accounts (targeting customers who compare rates and move money frequently). The bank is betting that most basic savings account holders will not notice or care about the low rate.

Banks can change rates on existing balances without notice

The rate advertised on a bank's website is the rate it is currently offering on new deposits. For existing balances, the bank can change the rate at any time. Most banks do not require advance notice, though some offer a grace period of a few days. Read your account agreement to see what your bank promises.

When the Fed cuts rates, banks lower deposit rates quickly—sometimes within days. When the Fed raises rates, banks raise deposit rates more slowly, because they want to keep the spread as wide as possible. This asymmetry is why savers often feel like they benefit less from Fed rate increases than borrowers suffer from them.

Some banks offer promotional rates that are higher than their standard rates but only for a limited time or only on new money. These rates are designed to attract deposits during a specific period. After the promotional period ends, the rate drops to the standard rate. Always check whether a rate is promotional before moving your money.

Economic conditions and bank strategy shape long-term rates

Beyond the Fed's rate and operating costs, banks consider the broader economy. During a recession, when people are more likely to default on loans, banks might lower deposit rates because they are worried about their ability to lend profitably. During strong economic growth, banks raise deposit rates because they can lend at higher rates to borrowers and still offer savers more.

A bank's overall strategy also matters. Some banks—often smaller or newer ones—use high savings rates as a way to grow deposits quickly. They accept a thin spread because they want to build their customer base. Larger banks with stable deposits might keep rates low because they do not need to compete as hard. A bank might also lower rates on savings accounts to push customers toward other products like certificates of deposit or money market accounts, where the bank can lock in longer-term funding.

Interest rate environment also affects how aggressively banks compete. When rates are rising, banks compete hard for deposits because savers have more options. When rates are falling, banks compete less because savers have fewer places to move their money. This is why high-yield savings rates tend to be highest when the Fed is raising rates and lowest when the Fed is cutting rates.

How to find the rates banks are actually offering right now

Bank websites show current rates, but they often bury the rate for basic savings accounts and highlight promotional rates. Look for the annual percentage yield (APY) in small print, and check whether it applies to new deposits only or to your entire balance. Compare rates across at least three banks—one online bank, one traditional bank, and one credit union if you have access to one.

Rates change frequently, so a rate you see today might be different next week. If you find a rate you like, move the money within a day or two. Banks honor the rate you saw at the time you opened the account, even if they lower it the next day. Some banks also offer rate-matching guarantees, where they will match a competitor's rate for a limited time if you show them proof.

Frequently Asked Questions

Why does my bank pay almost nothing on savings when the Fed's rate is so high?

Your bank is keeping most of the spread between what it pays you and what it charges borrowers. Basic savings accounts are low-competition products—most people do not shop around for them—so banks can pay very low rates. High-yield savings accounts pay much more because banks compete for those deposits. If your bank's rate feels too low, moving your money to an online bank or credit union usually takes less than a week.

If I move my money to a bank offering a higher rate, will that rate stay the same?

The rate you see when you open the account is the rate the bank is currently offering, but it can change after you deposit your money. Banks can lower rates on existing balances without notice in most cases. Your rate is not locked in unless the bank explicitly offers a fixed-rate product like a certificate of deposit. Check your account agreement to see what notice period, if any, your bank provides before lowering rates.

Why do online banks pay more than traditional banks?

Online banks have much lower operating costs because they have no physical branches and fewer employees per dollar of deposits. They can afford to pay higher rates and still make a profit. Traditional banks with hundreds of branches and thousands of staff need a larger spread to cover their expenses. The tradeoff is that online banks offer fewer services and less personal interaction.

What happens to my savings rate if the Fed cuts interest rates?

Your bank will lower the rate it pays on your account, usually within one to four weeks of the Fed's cut. The bank lowers rates on deposits faster than it lowers rates on loans, so the spread widens in the bank's favor. If you want to protect your rate, consider moving money to a certificate of deposit, which locks in a rate for a fixed period.

Can a bank lower my rate without telling me?

Yes, in most cases. Banks are not required to notify you in advance before lowering rates on savings accounts. Some banks offer a grace period of a few days, and some send a notice after the change takes effect. Check your account agreement or call your bank to see what notice policy it has. You can always move your money to another bank if the rate drops too low.