What the Federal Reserve’s Expected Interest Rate Change Means for Your Savings Account

The actions taken by the Federal Reserve impact the entire economy, and this includes savings account rates. When the Fed cuts the federal funds rate, banks typically follow suit by reducing their own interest rates. At the Federal Reserve’s recent meeting, Chair Jerome Powell hinted that a rate cut might be warranted as soon as next month, a shift in markets interpreted as potentially consequential for savers.

This article breaks down the chain reaction when the Fed cuts interest rates—with tips so you’re prepared whether rates rise or drop.

How the Federal Funds Rate Works

The federal funds rate is the interest rate that banks charge each other when borrowing money overnight, and it’s the key lever of U.S. monetary policy. The Federal Open Market Committee (FOMC) sets its target range eight times a year at scheduled meetings, and changes in the rate range typically influence short-term shifts in borrowing and savings rates across the economy. When the Fed adjusts this rate, banks often respond by tweaking the interest rates they offer for savings accounts and loans.

How Rate Cuts Hurt Savers

Since banks and other financial institutions generally shift their savings account interest rates based on the Fed’s adjustment to the federal funds rate, rate cuts tend to hurt savers. When the Fed cuts rates, annual percentage yields (APYs) on deposit accounts subsequently fall, which erodes the purchasing power of cash savings. And the more that savings APYs lag the rate of inflation, the more purchasing value savers lose.

In a declining rate environments, savers may want to consider alternatives, such as certificates of deposit (CDs) or Treasury bills to lock in an interest rate for a specified period. These financial alternatives allow you to hold onto a rate today for months or years into the future.

What to Watch for From the Fed

Fed announcements, especially following FOMC meetings, deliver crucial clues on rate direction. The next FOMC meeting is slated for Sept. 16-17, 2025, when a cut to the federal funds rate may be announced.The Fed always makes its announcement in the mid-afternoon of the second meeting day.

Keep an eye on the Fed’s dot plot, meeting minutes, and Powell’s speeches since Keep an eye on the Fed’s statement, meeting minutes, and the Chair’s comments and speeches, as well as the central bank’s quarterly dot plot, since these inform markets and often offer a preview of upcoming policy shifts. Staying informed on the timing and motivation behind Fed moves can help you act strategically to preserve your savings.

Why Savings Rates Rise and Fall With the Fed

Banks shift savings account APYs based on the Fed’s changes to the federal funds rate since shifts in the federal funds rate can directly affect their own costs of borrowing and overall profitability. 

There’s often a long or variable lag between Fed policy changes and the impact they have on certain key elements of the economy, such as inflation and the level of employment. Banks often lower savings account APYs when the Federal Reserve cuts interest rates because it reduces how much they earn on lending, prompting them to adjust payouts to savers accordingly.

High-Yield vs. Traditional Savings Accounts

Online high-yield savings accounts, or neobanks, typically offer higher APYs for savings accounts compared with APYs offered by traditional brick-and-mortar banks. One financial study indicated that for every 100-basis-point increase in the federal funds rate, online banks increased their APYs by about 30 basis points more than traditional banks.

As of August 2025, some banks are offering APYs as high as 5.00% on their high-yield savings products. At the same time, the average traditional savings account APY as of mid-August 2025 is just 0.39%. If the Fed does cut the federal funds rate in September, you can expect these savings rates to drift lower too.

How to Maximize Savings in a Changing Rate Environment

Here are some tips to maximize your savings when the Fed shifts interest rates:

• Shop for rates regularly; don’t just stick with the default rate offered to you.
• Maintain a flexible cash reserve in a high-yield savings account to help cover surprise expenses without being penalized for withdrawing early from a CD.
• Consider ladders of long-term CDs or T-bills that may offer better rates or stability.
• Stay alert to Fed rate shifts and then adjust your savings strategy accordingly.
• Review your APYs frequently to avoid unnecessarily leaving money on the table.

The Bottom Line

The Federal Reserve’s decisions directly impact how fast your savings will grow. By understanding how shifts in the federal funds rate affect banks and by knowing when to lock in better savings options, you can access higher returns and retain them longer. Be sure to stay informed, stay flexible, and make your savings work harder for you, no matter what the Fed may do next.