Why your online bank rate and the federal funds rate don't match

Before diving into why your savings rate looks different from the number you hear on the news, it helps to understand what the federal funds rate actually is and the role it plays in federal reserve interest rate policy. 

The federal funds rate is the interest rate at which banks lend money to each other overnight. The Federal Open Market Committee (FOMC) is a branch of the Federal Reserve that dictates monetary policy. It sets this rate as a tool to influence the broader economy, nudging inflation, employment, and spending in one direction or another. 

When the Fed raises this rate, borrowing becomes more expensive across the board. When it lowers the rate, borrowing gets cheaper. Because so many financial products are tied to this particular benchmark, changes to the federal funds rate ripple through everything from mortgage rates to credit card APRs, and yes, savings account yields.

But the federal funds rate isn't the rate you earn — it's the rate banks pay each other. Your savings APY is a product of many other factors layered on top of that baseline.

This is why the effective federal funds rate is currently 3.63% as of July 1, 2026, but interest on top high-yield savings accounts is around 4.15% and current 30-year fixed rate mortgages are hovering around 6.49%. It’s because those other products are based around the federal funds rate.

The federal funds rate may set the tone, but individual banks take multiple factors into account when setting their own rates for savings accounts and lending products alike. Understanding how online banks set interest rates means looking at the internal factors that shape the APY on your account.

Funding costs and asset-liability management

When you deposit money in a savings account, the bank doesn't just hold it in a vault. It puts your deposit to work by lending it out through mortgages, personal loans, and other credit products. The interest earned on those loans is how the bank generates revenue, and a portion of that revenue comes back to you as your savings APY.

This balancing act between what a bank earns on its assets (loans) and what it pays on its liabilities (your deposits) is called asset-liability management. Banks need to maintain a healthy spread between what they earn and what they pay in order to cover operating expenses and remain profitable. That spread is where bank profit margins on deposits come from.

Say a bank lends money at an average rate of 7.00% and pays depositors an average of 4.50%. That 2.50% spread covers the bank's costs and contributes to its bottom line. If the Fed raises rates by 0.50%, the bank might increase its lending rate to 7.50% but only raise deposit rates to 4.75%. The spread actually widens, and the bank keeps the difference.

So when the Fed raises rates, banks can afford to pay you more on deposits. But how much of that increase reaches your account depends on multiple factors: 

• Competition. If rival banks are raising their rates aggressively, your bank may feel pressure to follow suit to avoid losing depositors. In a less competitive environment, there's less incentive to pass along the full increase.

• The bank's current financial position. A bank with a strong balance sheet and healthy profits may not need to attract new deposits as urgently, which means it can afford to be slower or more selective about raising rates.

• How urgently the bank needs to attract new deposits. Banks that are actively growing, funding new loan products, or rebuilding their deposit base after outflows are more likely to raise rates quickly and generously to bring in fresh capital.

The structural advantages of online-only banks

Online banks operate without the overhead of maintaining physical branches. There's no rent, no teller staff, and no utility bills for hundreds of locations. These savings translate directly into higher APYs for customers.

This is a structural advantage, and it’s why you'll often see online bank high-yield savings accounts offering rates well above the national average. Without the cost of a branch network, online banks can afford to be more generous with the rates they pass along to depositors.

That said, even online banks don't pass along the full federal funds rate. They still have operational costs like technology infrastructure, customer support, regulatory compliance, and marketing, all of which factor into the rate they can sustainably offer.

If you've ever noticed that your savings rate seems to creep up slowly after the Fed raises rates but drops a bit faster during fed rate cuts, you've experienced the effects of deposit beta.

Deposit beta measures how much of a federal funds rate change a bank passes on to depositors. A deposit beta of 100% would mean your rate moves in lockstep with the Fed. In practice, it's almost always less than that, and it's one of the clearest reasons the federal funds rate vs savings account APY rarely line up.

Here's how it works. Say the Fed raises rates by 0.50%. If your bank increases your APY by 0.30%, the deposit beta is 60%. The remaining 0.20% stays with the bank, widening its profit margin. If a competing bank raises its rate by 0.40%, its deposit beta is 80%, meaning it's passing more of the benefit along to depositors.

Several factors influence deposit beta:

• Customer loyalty and deposit stability. Banks with strong deposit bases and loyal customers may feel less pressure to raise rates quickly. If depositors aren't moving their money, the bank has less incentive to compete on rate.

• Growth strategy. Banks actively looking to grow their deposit base may raise rates faster to attract new customers. A newer online bank trying to build market share, for example, might have a deposit beta closer to 90%, while a well-established bank might sit closer to 50%.

• The direction of rate changes. Banks tend to pass along rate cuts more fully and more quickly than rate increases. This means rate hikes often reach your account more slowly and less completely than rate decreases do. This pattern has been consistent across multiple federal reserve interest rate policy cycles.

Understanding deposit beta can help you set realistic expectations. When the Fed announces a rate hike, it's reasonable to expect some improvement in your APY, just not necessarily the full amount, and not immediately.

Beyond the Fed's decisions and a bank's internal economics, broader market forces also shape the rate on your savings account.

• Competition among banks is one of the biggest drivers of savings rates. When multiple online banks compete for the same pool of depositors, they often push rates higher to stand out. For example, in a competitive market, one bank might offer 3.75% APY on a high-yield savings account while a rival offers 4.15% to attract the same customers. This kind of marketplace dynamic is beneficial for savers because it naturally drives more competitive choices.

• The broader economic environment also matters. During periods of economic uncertainty, banks may hold larger cash reserves and feel less urgency to attract new deposits. When the economic growth is steady and loan demand is high, on the other hand, banks may raise deposit rates to bring in more funds they can lend out. These shifts in the economy directly influence how online banks set interest rates from one quarter to the next.

• Regulatory requirements play a role, too. Banks must maintain certain capital ratios, and the cost of meeting those requirements can affect the rates they offer. Changes in regulation can shift the landscape in ways that sometimes benefit depositors and sometimes don't.

• Inflation expectations round out the equation. If banks expect inflation to remain elevated, they may offer higher rates to attract deposits that might otherwise flow into other investments like Treasury bills or I-bonds. If inflation seems to be cooling, there's less pressure to compete on rate alone.

All of these forces interact with one another. The rate you see on your savings account is the result of a complex calculation, one that starts with the federal funds rate but factors in far more than that single number.

Your online bank savings rate and the federal funds rate are connected, but they'll rarely be an exact match. The Fed sets the benchmark, and your bank uses it as a starting point, layering in its own costs, competitive strategy, and economic outlook to arrive at the APY you earn.

The good news is that online banks consistently offer some of the most competitive rates available. While no savings account will perfectly mirror every Fed move, choosing the right account can make a meaningful difference in how much your money earns over time.

To make confident decisions about where to keep your savings, it helps to compare your options side by side. On Raisin’s platform, you can explore competitive rates on high-yield savings accounts, certificates of deposit (CDs), and money market accounts, all in one place, all from federally regulated banks and credit unions.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.