How the Fed Funds Rate Translates to Your Savings APY

The Fed funds rate affects savings rates through a specific mechanism — most people do not know how it works.

The federal funds rate is the target rate for overnight lending between banks. When Bank A is short on reserves at the end of the day, it borrows from Bank B at approximately the target rate. This rate is the anchor for short-term borrowing costs throughout the financial system.

From the fed funds rate, the transmission works as follows. Banks' cost of funds (what they pay for short-term money) moves with the fed funds rate. As their borrowing cost rises, the floor on what they must earn on loans and investments rises correspondingly. To attract depositor cash (an alternative funding source), banks must offer rates competitive with what they can earn elsewhere. For online banks with limited alternative funding sources, this competition for deposits is acute — which is why HYSA rates track the fed funds rate closely.

The passthrough rate — what fraction of a Fed rate change reaches your savings account — is approximately 60–80% at online banks for rate increases and 70–90% for rate decreases. The asymmetry (faster cuts than hikes) reflects the fact that deposit rates are not regulated minimum rates. Banks have no obligation to raise rates and face strong competitive incentive to cut them as fast as the market allows.

The lag between a Fed decision and a rate change in your account is typically 2–14 days. Larger online banks (Ally, Marcus) update within a week of the FOMC decision. Smaller online banks may take longer. Big-four banks may not move at all on savings rates — their deposit base is rate-insensitive enough that the competitive pressure does not reach them.