When the Federal Reserve raises interest rates, savers naturally expect their savings accounts to pay more. But history shows that the relationship between Federal Reserve rate hikes and bank deposit rates is more complicated than simply “the Fed raises rates, so savings rates go up.”
Savings rates generally rise during periods of monetary tightening, but they often move more slowly, rise by less than the federal funds rate, and behave differently depending on the type of account and the competitive environment among banks.
Looking at previous Federal Reserve tightening cycles provides a useful way to understand what savers can expect when rates rise.
The Fed Does Not Directly Set Your Savings Rate
The Federal Reserve controls the target range for the federal funds rate, which influences the broader cost of short-term borrowing throughout the financial system. Individual banks, however, set the rates they pay to depositors.
This distinction is important.
When the Fed raises its policy rate by 0.25 percentage points, a bank does not have to increase its savings account APY by exactly 0.25 percentage points.
Banks consider factors such as their need for deposits, competition from other institutions, loan demand, profitability, and the amount of liquidity already available to them.
Research from the Federal Reserve Bank of New York shows that deposit rates generally follow the federal funds rate, but the pass-through is incomplete. The portion of a Fed rate change that is reflected in deposit rates is commonly described as the deposit beta.
This is one of the most important concepts for understanding the history of savings rates.
The 1994–1995 Rate-Hiking Cycle
One of the major tightening periods examined by Federal Reserve researchers occurred between 1994 and 1995.
During this period, the Federal Reserve raised interest rates significantly as policymakers sought to manage economic conditions and inflationary pressures.
Savings rates did eventually respond, but not immediately or proportionally.
Federal Reserve research examining the 1994–1995 cycle found that deposit rates initially showed relatively little response before increasing more noticeably later in the tightening cycle.
This illustrates an important historical pattern: banks do not necessarily reprice deposits immediately after every Fed hike.
For consumers, that can mean a delay between a Federal Reserve announcement and a meaningful improvement in the rate offered on an ordinary savings account.
Historical Bankrate data also show that average savings APYs were considerably higher during the late 1980s and early 1990s than during the low-rate environment that followed.
The Late-1990s Rate Environment
The Federal Reserve also tightened monetary policy during the late 1990s.
However, the savings-rate environment illustrates why looking at the Fed funds rate alone can be misleading.
Banks do not automatically compete aggressively for deposits simply because the Fed is raising rates. If a bank already has plenty of deposits, it may have little reason to increase the rate it pays customers.
Historical Bankrate data show the national average savings APY declining substantially through the late 1990s and early 2000s despite changes in monetary policy over that broader period.
The lesson is that the direction of the Fed’s policy rate and the rate offered on an individual savings account can diverge for periods of time.
The 2004–2006 Hiking Cycle
The 2004–2006 tightening cycle provides one of the clearest examples of savings rates responding to higher policy rates.
The Federal Reserve began raising the federal funds target in June 2004. It continued increasing the rate through 2005 and 2006, eventually reaching 5.25%.
The Federal Reserve’s historical records show a long sequence of 25-basis-point increases during this period.
Unlike some earlier cycles, deposit rates became increasingly responsive as the tightening cycle progressed.
Federal Reserve Bank of New York research found that cumulative deposit betas during the 2004 cycle became considerably higher than those observed in the post-financial-crisis period. At one point, the cumulative beta approached 60%.
In practical terms, this means that banks passed a larger portion of the Federal Reserve’s rate increases through to depositors.
Competition mattered.
As interest rates increased, banks had greater incentives to attract and retain deposits, particularly when those deposits were valuable for funding loans and other assets.
The Financial Crisis Changed the Relationship
The financial crisis dramatically changed the interest-rate environment.
The Federal Reserve eventually reduced its target rate to essentially zero, creating an extended period in which traditional savings accounts generated very little interest.
Bankrate’s historical series shows national-average savings APYs falling to extremely low levels during the years following the financial crisis. The annual average was just 0.19% in 2010 and declined further in subsequent years.
This low-rate period lasted for years.
Even when the Federal Reserve eventually began raising rates in December 2015, savings rates initially remained extremely low.
The 2015–2019 Hiking Cycle
The Federal Reserve began its post-financial-crisis tightening cycle with a 25-basis-point increase in December 2015.
Further increases followed during 2016, 2017 and 2018. By the end of 2018, the target federal funds range had reached 2.25%–2.50%.
But savings account rates did not rise one-for-one with the Fed.
Federal Reserve Bank of New York researchers found that deposit betas during the post-financial-crisis tightening cycle were much lower than during the 2004–2007 cycle. They ultimately remained below 40% in their analysis.
This is an important lesson for today’s savers.
Even during a prolonged series of Fed hikes, a bank may pass through only part of the increase to depositors.
The 2022–2023 Rate-Hiking Cycle
The most dramatic recent example came after the COVID-era period of exceptionally low interest rates.
Beginning in March 2022, the Federal Reserve rapidly increased the federal funds target range.
The rate went from 0.25%–0.50% in March 2022 to 5.25%–5.50% by July 2023. That represented a cumulative increase of 525 basis points.
Savings rates increased substantially during this period, but again, not immediately and not equally across banks.
The St. Louis Federal Reserve noted that during the 2022–2024 period, deposit rates continued increasing even after the Fed had stopped raising its policy rate. The cumulative deposit beta increased from -0.03 in early 2022 to 0.51 by the second quarter of 2024.
Why did that happen?
One major factor was competition for deposits.
During the early stages of the pandemic, banks had unusually large amounts of deposits, partly because of government stimulus and reduced consumer spending. That reduced their immediate need to offer higher deposit rates.
As the tightening cycle continued, however, competition for deposits increased.
That eventually pushed banks to pay more to attract and retain customers.
Why High-Yield Savings Accounts Often Move Faster
Not every savings account responds to Fed policy at the same speed.
Traditional brick-and-mortar banks frequently maintain relatively low savings rates because many customers prioritize convenience, branches, existing relationships, and other services.
Online banks often compete more aggressively on deposit rates.
This means that during a rising-rate environment, consumers who actively compare accounts may see their potential earnings increase substantially even when the national average savings rate changes much more slowly.
Historical Bankrate data demonstrate how wide the gap can become between broad national averages and the rates available from more competitive institutions.
Why Savings Rates Sometimes Keep Rising After the Fed Stops
One of the most interesting historical patterns is that savings rates do not always peak at the same time as the Federal Reserve’s policy rate.
Banks may continue raising deposit rates after the Fed has stopped hiking if they need additional funding.
The 2022–2024 period provides a clear example. According to the St. Louis Fed, deposit rates continued increasing even though the effective federal funds rate was essentially unchanged between the final rate hike and the second quarter of 2024.
This means savers should not assume that the day of the final Fed hike is automatically the day when savings rates reach their peak.
What History Tells Savers
Several patterns emerge from previous tightening cycles.
First, savings rates usually respond to higher Fed rates, but imperfectly.
A 1-percentage-point increase in the federal funds rate does not necessarily produce a 1-percentage-point increase in a savings account APY.
Research from the St. Louis Fed examining multiple tightening cycles found that, on average, a 1-percentage-point increase in the federal funds rate was associated with roughly a 0.36-percentage-point increase in deposit rates.
Second, timing matters.
There can be a significant delay between Federal Reserve decisions and changes in deposit rates.
Third, bank competition matters enormously.
Two banks can respond very differently to exactly the same Fed decision.
Fourth, account type matters.
A basic savings account, high-yield savings account, money-market deposit account, and CD can respond differently to changes in the interest-rate environment.
What Should Savers Watch During the Next Hiking Cycle?
If the Federal Reserve begins raising rates again, consumers should watch more than the Fed’s headline announcement.
Pay attention to:
- The Federal Reserve’s target federal funds range
- National-average savings rates
- High-yield savings account APYs
- CD rates at different maturities
- Money-market deposit rates
- Bank promotions and introductory rates
- Minimum balance requirements
- Withdrawal restrictions
- Whether the rate is variable or fixed
It is also important to compare APY rather than simply the stated interest rate, because APY incorporates the effects of compounding.
The Bottom Line
History shows that Federal Reserve rate hikes generally create an environment in which savings rates can rise, but the relationship is neither immediate nor one-to-one.
During some tightening cycles, banks passed a relatively large portion of Fed increases to depositors. During others, deposit rates responded much more slowly.
The 1994–1995, 2004–2007, 2015–2019, and 2022–2023 cycles all demonstrate different versions of the same basic principle: the Federal Reserve influences the environment, but individual banks ultimately determine what they pay savers.
For consumers, the practical takeaway is simple. When rates rise, do not assume your existing savings account will automatically become competitive. Compare APYs, monitor how quickly your bank responds to changes in monetary policy, and consider whether moving some cash to a more competitive savings product or locking in a fixed CD rate makes sense for your particular time horizon.
This article is for educational purposes only and does not constitute financial, investment, or tax advice. Historical relationships between Federal Reserve policy and deposit rates do not guarantee how banks will respond to future rate changes.