Interest rates are set by the Federal Reserve, not by individual banks, and they move based on inflation and economic conditions

The Federal Reserve — the central bank of the United States — decides the baseline interest rate that banks use to lend money to each other. That rate, called the federal funds rate, filters down to affect the rates you see on savings accounts, money market accounts, and certificates of deposit (CDs). When the Fed raises its rate, banks typically raise the rates they offer you. When the Fed lowers its rate, your rates usually fall too.

The Fed does not raise or lower rates randomly. It moves them in response to inflation (the speed at which prices are rising) and the overall health of the economy. If inflation is high, the Fed raises rates to make borrowing more expensive, which slows down spending and brings prices down. If the economy is weak or inflation is low, the Fed lowers rates to make borrowing cheaper, which encourages spending and growth.

Whether rates are "going up" or "going down" depends on what the Fed has decided most recently. The Fed meets eight times a year to decide whether to change the federal funds rate. You can find the current rate and the Fed's recent decisions on the Federal Reserve's official website.

Key Takeaways

  • The Federal Reserve sets the baseline rate that determines what banks offer on savings accounts and CDs, and this rate changes based on inflation and economic conditions.
  • When the Fed raises its rate, banks raise the rates they offer you on deposits; when the Fed lowers its rate, your rates fall.
  • The Fed meets eight times per year to decide whether to change rates, and you can see their decisions and current rate on the Federal Reserve's website.
  • Higher rates mean your savings earn more interest, but they also make loans and mortgages more expensive.
  • Rates vary by bank and account type, so even when the Fed's rate is the same, different banks may offer different rates on the same product.

How the Fed's decisions reach your bank account

When the Federal Reserve announces a change to the federal funds rate, banks do not automatically change your rate the same day. Banks decide when and how much to adjust their own rates based on competition, their costs, and their strategy. Some banks move quickly; others wait weeks or months. A bank offering a high savings rate today might lower it next month if the Fed signals future rate cuts.

The connection is strongest for variable-rate products like savings accounts and money market accounts. These rates can change at any time, and banks often adjust them within days or weeks of a Fed move. Fixed-rate products like CDs lock in a rate for a set term, so a CD you opened at 4.5% stays at 4.5% even if rates fall to 2% later.

This is why timing matters if you are comparing rates across banks. The rate you see today may not be the rate you get tomorrow, especially if the Fed has signaled a change is coming.

What rising rates mean for your savings

When interest rates are rising, banks compete to attract deposits by offering higher rates. A savings account that paid 0.01% a year might jump to 4% or higher during a period of rising rates. This is good news if you have money sitting in savings — you earn more interest without doing anything.

The catch is that rising rates do not last forever. Once the Fed stops raising rates and starts lowering them (which happens when inflation cools or the economy weakens), banks lower their rates too. Money you locked into a CD at a high rate is protected for the CD's term, but money in a savings account will earn less once rates fall.

This is why some people move money into CDs when rates are high — they want to lock in the rate before it drops. Others keep money in savings accounts because they might need it sooner and do not want to pay an early withdrawal penalty.

What falling rates mean for your savings

When interest rates are falling, banks lower the rates they offer on savings accounts and money market accounts. A savings account earning 4% might drop to 2% or lower. Your money still earns interest, but you earn less of it each month.

Falling rates are usually a sign that the economy is slowing or inflation is dropping. While lower rates hurt savers, they help borrowers — mortgages, car loans, and credit card rates all become cheaper. The Fed lowers rates to encourage people and businesses to spend and borrow, which can help the economy recover.

If you think rates are about to fall, locking money into a CD at the current rate protects you from the drop. Once rates fall, you cannot get that higher rate back unless you wait for the CD to mature and then open a new one at whatever the new rate is.

Why different banks offer different rates even when the Fed's rate is the same

The Federal Reserve's rate is a baseline, not a price that every bank must follow. Banks set their own rates based on how much they need deposits, what they can earn by lending that money out, and how much they want to spend on marketing.

A large bank with plenty of deposits might offer a low savings rate because it does not need more money. An online bank with low overhead costs might offer a high rate to attract customers. A credit union might offer rates between the two. You can see these differences by comparing rates across banks — the same account type can pay 0.01% at one bank and 4.5% at another.

This is why shopping around matters. The Fed's decisions set the direction, but your bank's decision determines what you actually earn.

How to track whether rates are rising or falling

The easiest way to track the Fed's rate is to visit federalreserve.gov and look for the current federal funds rate. The site also shows the dates of upcoming Fed meetings and the decisions from past meetings. You can see whether the Fed raised, lowered, or held steady at each meeting.

To track what banks are actually offering, visit comparison sites that list current rates from multiple banks. These sites update regularly and let you filter by account type (savings, money market, CD) and CD term length. The rates you see are current as of the date shown, but they can change at any time.

If you are deciding whether to open a CD or move money to a savings account, check both the Fed's recent decisions and what banks are offering right now. If the Fed has signaled it is done raising rates, locking into a CD makes sense. If the Fed is still raising rates, you might wait a few weeks to see if rates go higher.

The difference between the Fed's rate and the rates you see

The federal funds rate is the rate banks charge each other for overnight loans. It is not the rate you earn on a savings account or pay on a mortgage. Instead, it is the foundation that other rates are built on top of.

Banks add a spread — a markup — to the Fed's rate when they set their own rates. A savings account might earn the Fed's rate minus 2 percentage points. A mortgage might cost the Fed's rate plus 3 percentage points. These spreads vary by bank, by product, and by market conditions.

This is why you might hear that the Fed raised rates by 0.25 percentage points, but your savings account rate only went up by 0.1 percentage points. The bank did not pass the full increase to you — it kept some of the spread for itself.

Frequently Asked Questions

How often does the Federal Reserve change interest rates?

The Federal Reserve meets eight times per year to decide on interest rates. It does not change rates at every meeting — sometimes it holds the rate steady. You can see the schedule of upcoming meetings and the decisions from past meetings on federalreserve.gov.

If the Fed raises rates, will my savings account rate go up immediately?

No. Banks decide when to change their rates, and they may wait days, weeks, or longer after a Fed decision. Some banks raise rates quickly to attract customers; others move slowly. Check your bank's website or call to see if your rate has changed.

Should I move my money to a CD if rates are rising?

That depends on when you think rates will stop rising and start falling. If you believe rates are near their peak, locking into a CD protects you from future drops. If you think rates will keep rising, waiting a few weeks might get you a higher rate. No one can predict the future, so consider your own timeline and how much interest you need to earn.

What happens to my CD rate if the Fed lowers rates after I open it?

Your CD rate stays the same for the entire term. If you opened a one-year CD at 4.5% and the Fed lowers rates the next month, your CD still earns 4.5% for the full year. This is the benefit of a fixed-rate product — you are protected from rate drops.

Can I predict what the Fed will do next?

The Fed releases statements after each meeting that hint at future moves, and financial news outlets analyze these statements constantly. However, the Fed changes course based on new economic data, so predictions are often wrong. Rather than trying to predict, focus on your own needs — how long you can leave money untouched, and what rate you need to meet your goals.