How Banks Set Your Savings APY — and Why It Lags the Fed on the Way Up
When the Fed raises rates, your savings account doesn't automatically follow. Here is how banks really set savings rates, why they lag on the way up and how to tell when yours has gone stale.
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📐 Figures verified Sep 28, 2026 against the Federal Reserve's September 16, 2026 decision, the FDIC's national deposit rates, Regulation DD's account-disclosure (12 CFR 1030.4) and change-in-terms (1030.5) rules and FDIC deposit insurance. The bank examples are illustrative. How we check numbers →
Banks set savings rates by what they need to keep and attract deposits, not by a formula tied to the Fed. When the Fed raises rates, many pass along only a fraction, slowly, especially to loyal customers. Online banks competing for deposits pass along more. Compare your APY with the Fed's range and with other insured banks, and move if yours is stuck.
Numbers That Matter
| Figure | Amount | Source | Verified |
|---|---|---|---|
| Federal funds target range | 3.75%–4.00% since Sep. 16, 2026 | Federal Reserve | Sep 28, 2026 |
| National average deposit rates | Savings, money market and CD averages, published monthly | FDIC | Sep 28, 2026 |
| Before you open an account | The bank must disclose the APY, and each tier's rate for tiered accounts | Regulation DD, 12 CFR 1030.4 | Sep 28, 2026 |
| Rate cuts on a variable-rate savings account | No advance notice required; other adverse changes need 30 days' notice | Regulation DD, 12 CFR 1030.5 | Sep 28, 2026 |
| Safety of your deposits | $250,000 per depositor, per insured bank, per ownership category | FDIC | Sep 28, 2026 |
How Banks Actually Set Savings Rates
Your savings rate is a price the bank chooses. It weighs how much it needs deposits to fund loans, what competitors pay and how likely you are to leave. Banks with big branch networks and loyal customers can pay little, because many people never move their money. Online banks without branches compete on rate, so they tend to pay much more.
Deposit Beta: Why Rates Lag on the Way Up
Economists call the share of a Fed change a bank passes along its deposit beta. If the Fed raises rates by 1.00 point, a bank with a beta of 0.2 raises savings by 0.20 point; one with a beta of 0.8 raises it by 0.80. Betas tend to start low and rise as a hiking cycle goes on and competition heats up. In 2022–23, the Fed's rate rose more than five points while the FDIC's national average savings rate stayed well under 1%, even as some online banks paid 4% to 5%.
Teaser, Tiered and Relationship Rates
- Teaser APYs pay a high promotional rate for a few months, then drop. Compare the rate you'll earn after the promotion.
- Tiered APYs pay different rates by balance; some pay the top rate only on part of your money. Regulation DD requires each tier's rate to be disclosed.
- Relationship rates require a linked checking account or direct deposit. Make sure you'll meet the conditions.
- Silent cuts: a variable savings rate can be lowered without advance notice, so check it every few months.
A Stale-Rate Checklist
- Compare your APY with the Fed's range. A rate far below it means your bank is keeping most of the gap.
- Compare with other insured banks and the FDIC's national averages.
- Check when your rate last changed. If the Fed moved and your bank didn't, it's stale.
- Read the tier and promotion terms before you move.
- Move the savings, not necessarily the checking. A separate insured savings account captures most of the gain.
Worked Example: What a Stale Rate Costs
- A stale 0.40% account earns $100 a year; a competitive 4.00% account earns $1,000. The gap is $900 a year.
- A teaser: 5.00% for 3 months, then 1.50%, averages only 2.38% over the first year, below a steady 4.00%.
- A 1.00-point Fed hike: a low-beta bank adds 0.20 point ($50 a year on $25,000); a high-beta bank adds 0.80 ($200).
Rates are illustrative; check current offers and the FDIC's national averages.
Decision Rules
If this, then that
- If your savings rate is far below the Fed's range → open an insured account paying close to market rates.
- If an offer is a teaser → compare the rate after the promotion ends.
- If your balance is large → check tier rules and the $250,000 insurance limit.
- If the Fed just hiked → check within a month whether your bank followed.
- If you'd rather not watch rates → consider Treasury bills or a money market fund, which track the Fed closely.
Mistakes to avoid
- Assuming your bank raised your rate when the Fed did.
- Choosing a teaser without checking the rate after it.
- Missing a relationship-rate condition and earning the base rate.
- Chasing tiny rate differences with constant account switching.
- Exceeding insurance limits at one bank to get a slightly higher rate.
Related: rate-hike cycles since 1980 shows what happened to savers each time; high-yield savings accounts covers where cash earns more; how to choose a bank scores APY lag with 11 other checks; and T-bills vs savings vs CDs compares the safe options.