Banks pay low rates because the Federal Reserve sets the ceiling for what they can earn on reserves

Savings account rates move with the federal funds rate, which the Federal Reserve sets roughly eight times a year. When the Fed raises that rate, banks can charge more for loans and earn more on the money they hold. When it falls, banks earn less—and they pass almost none of that loss back to you. The Fed's rate has been low for most of the past fifteen years, which is why savings accounts have paid between 0.01% and 0.5% for most of that time.

Banks also pay low rates because they do not need your money as urgently as they once did. During the 2008 financial crisis, banks competed fiercely for deposits because they were desperate for cash. Now, banks have stable funding from other sources—wholesale borrowing, investment accounts, and customer checking accounts that pay nothing. A savings account that pays 0.01% costs them almost nothing and keeps your money on their books, so they have no reason to offer more.

The rate you see advertised is also not the rate most customers actually receive. Large banks like Chase, Bank of America, and Wells Fargo advertise rates between 0.01% and 0.05% on regular savings accounts. Those rates apply to balances under a certain threshold—often $25,000 or $100,000. Balances above that threshold earn even less, sometimes nothing. A customer with $500,000 in a Chase savings account earns roughly $25 per year.

Key Takeaways

  • The Federal Reserve's interest rate sets the upper limit on what banks will pay for savings, and that rate has been historically low since 2008.
  • Large national banks pay the lowest rates because they have many other ways to fund their operations and do not compete for deposits.
  • Online banks and credit unions often pay 4 to 5 times more than large banks because they have lower overhead costs and compete directly on rate.
  • Your rate may drop without notice if the Fed cuts rates or if your bank decides to lower its offer, so checking your rate once or twice a year is worth doing.
  • Moving money to a higher-paying account takes a few days but can earn you hundreds of dollars per year on a large balance.

How the Federal Reserve's decisions flow down to your account

The Federal Reserve does not set savings account rates directly. Instead, it sets the federal funds rate—the rate at which banks lend reserve balances to each other overnight. When the Fed raises this rate, banks can charge more for mortgages, car loans, and credit cards. They can also earn more on the reserves they hold at the Fed itself. In theory, banks should pass some of that extra income to savers. In practice, they keep most of it.

The relationship between the Fed rate and your savings rate is loose and one-directional. When the Fed raises rates, banks raise savings rates within weeks—but usually by a fraction of the increase. When the Fed cuts rates, banks cut savings rates immediately and by the full amount. From 2015 to 2018, the Fed raised rates nine times, moving the federal funds rate from near zero to 2.5%. During that same period, the average savings account rate rose from 0.01% to 0.09%. Banks kept the difference.

The Fed has cut rates sharply twice in the past fifteen years: in 2008 and in 2020. Both times, savings rates fell to near zero within weeks. The Fed began raising rates again in 2022, and some banks did raise savings rates—but only online banks and credit unions moved quickly. Large national banks waited months or raised rates by tiny amounts. A customer who moved $100,000 from Chase (0.01%) to an online bank (4.5%) in mid-2023 earned roughly $4,500 more per year on the same money.

Why online banks and credit unions pay more than national banks

Online banks have lower overhead costs than brick-and-mortar banks. They do not maintain branches, employ tellers, or pay rent on thousands of locations. Those savings let them offer rates that are 4 to 5 times higher than Chase or Bank of America on the same deposit. Online banks also compete directly on rate because they have no other way to attract customers—they cannot offer you a free checking account with a debit card and a branch on your corner. Rate is their only selling point.

Credit unions operate on a different model: they are member-owned cooperatives, not shareholder-owned corporations. A credit union's goal is to return earnings to members through better rates and lower fees, not to maximize profit for investors. Credit unions also tend to be smaller and more local, which means they know their members and can make lending decisions based on relationships rather than algorithms. This model lets them pay higher savings rates while still maintaining capital reserves.

The tradeoff is access and convenience. An online bank has no physical location and no phone support in most cases. A credit union may have limited branch networks and may charge fees if you use another credit union's ATM. For someone who rarely needs to deposit cash or speak to a person, an online bank's 4.5% rate is worth the inconvenience. For someone who needs to walk into a branch or prefers phone support, a credit union at 3.5% to 4% may be the better choice.

How banks decide when to lower your rate

Banks can lower your savings rate at any time without your permission. Federal law requires them to notify you before the change takes effect, but the notification is often buried in an email or a notice on their website. You are not required to move your money—you can keep it in the account at the new, lower rate. Many people do, which is why banks can cut rates and keep most of their deposits.

Large banks lower rates when they have more deposits than they need. During the pandemic, people saved aggressively and moved money into banks. Banks suddenly had more cash than they could lend out profitably, so they cut savings rates to discourage new deposits. Chase cut its savings rate from 0.05% to 0.01% in 2021 even though the Fed had not cut rates. The bank simply did not want more money.

Online banks and credit unions also lower rates, but they do so more slowly and by smaller amounts. Because they compete on rate, cutting too aggressively means losing customers to competitors. A credit union that pays 4.5% will lose members if it cuts to 3% while another credit union nearby still pays 4.25%. Large banks have no such pressure—a customer with $50,000 at Chase earning 0.01% is unlikely to move it for a 0.02% rate at another large bank.

What happens to rates if the Fed cuts again

If the Federal Reserve cuts the federal funds rate, savings rates will fall within weeks. Online banks and credit unions will cut first and by the largest amounts, because they compete on rate and need to protect their margins. Large national banks will cut more slowly, but they will cut. A savings account paying 4.5% today could pay 2% or less within six months if the Fed cuts rates by 2 percentage points.

This is why locking in a high rate now matters if you think rates will fall. Some banks offer high-yield savings accounts that adjust rates daily based on market conditions. Others offer certificates of deposit (CDs) that lock in a rate for a fixed term—six months, one year, five years. A CD paying 5% for one year guarantees that rate even if the Fed cuts and savings rates fall to 1%. The tradeoff is that you cannot withdraw the money without a penalty.

For most people, a high-yield savings account at an online bank or credit union is the best choice right now. You keep your money accessible, you earn a rate that is 100 to 200 times higher than a large bank, and you can move the money if rates fall and you find a better option elsewhere. The rate will eventually fall, but you will have earned more in the meantime than you would have at Chase.

How to find out what your bank is actually paying

Log into your bank's website or app and look for the account details or account summary page. The rate should be listed there, usually labeled "Annual Percentage Yield" or "APY". If you cannot find it, call the bank's customer service line and ask for the current APY on your savings account. Write it down—you will want to compare it to other banks and to check it again in six months.

Compare your rate to online banks and credit unions using a rate aggregator like Bankrate, DepositAccounts, or the FDIC's National Rates and Rate Caps page. These sites update daily and show you the highest rates available. If your bank is paying 0.01% and online banks are paying 4.5%, you are leaving thousands of dollars on the table over time. Moving the money takes three to five business days and costs nothing.

Check your rate twice a year—once in spring and once in fall. Banks change rates without warning, and a rate that was competitive six months ago may have fallen by half. A quick check takes five minutes and can tell you whether it is time to move your money. Many people set a phone reminder to check in March and September.

Frequently Asked Questions

Will my savings account rate go back up?

Rates rise when the Federal Reserve raises the federal funds rate, which happens when inflation is high or the economy is growing too fast. The Fed cannot predict its own future moves, so nobody knows when or if rates will rise again. If you need the money within a year or two, a high-yield savings account is safer than a CD because you can access it if rates fall. If you do not need the money for five years, a five-year CD locks in today's rate and protects you if rates fall.

Is my money safe in an online bank?

Yes, as long as the bank is FDIC-insured. The FDIC (Federal Deposit Insurance Corporation) insures deposits up to $250,000 per account holder per bank. Most online banks are FDIC-insured, and you can check by searching the bank's name on the FDIC's BankFind tool. Your money is just as safe in an online bank as it is in Chase or Bank of America.

Why do some banks pay 5% and others pay 4%?

Banks set their own rates based on how much money they need and how much they can earn by lending it out. A bank that needs deposits will pay more. A bank that has plenty of deposits will pay less. Rates also vary by account type—money market accounts sometimes pay more than savings accounts, and CDs pay more than either. Check the rate for the specific account type you want before moving your money.

Can I move my money without losing interest?

Yes. Interest accrues daily and is usually paid monthly. If you move your money on the 15th of the month, you will receive interest through the 14th from your old bank and start earning the new rate on the 15th at your new bank. You will not lose any interest. The transfer itself takes three to five business days, during which your money sits in transit and earns nothing, but that is only a few dollars on most balances.

What if I need the money in a few months?

Keep it in a high-yield savings account, not a CD. CDs charge a penalty if you withdraw before the term ends—often three to six months of interest. A savings account has no penalty and lets you withdraw whenever you need to. The rate is lower than a CD, but you avoid the penalty risk. If you are certain you will not need the money for at least six months, a six-month CD will pay more than a savings account.