What Happens to HYSA Rate When the Fed Cuts Rates?
TL;DR
Top online HYSAs (Marcus, Ally, Discover, Capital One 360) pass through 75-90% of Fed cuts within 1-4 weeks. A 25 bp Fed cut translates to a 19-23 bp HYSA drop. Legacy big banks pass through less — sometimes 5-20% — but were also paying less to start with. Over a typical 100-bp cutting cycle, top HYSAs drop ~75-90 bps total. Locked CDs and MYGAs issued before the cut are unaffected.
The short answer
When the Fed cuts the federal funds rate, top online HYSAs (Marcus, Ally, Discover, Capital One 360) drop their APY by roughly 75-90% of the Fed move within 1-4 weeks. A 25 basis point Fed cut typically translates to a 19-23 bp HYSA APY drop. Over a 100-bp cutting cycle, expect your top HYSA to drop 75-90 bps in total within 6-10 weeks of the final cut.
Legacy big banks (Chase, Bank of America, Wells Fargo, Citi) pass through far less — sometimes only 5-20% of cuts — but they were also paying 0.01-0.10% to start with. Their savings APYs barely move because they were already at the bottom.
The mechanism
HYSAs are not directly indexed to the Fed funds rate. There is no contractual formula. Banks set HYSA APYs based on their funding costs, which are anchored to the Fed funds rate plus a competitive spread.
When the Fed cuts 25 bps, three things happen at the bank:
- The bank's overnight funding cost drops 25 bps.
- Other banks' competitive HYSA offers drop within a few weeks.
- The bank adjusts its own HYSA APY to maintain competitive position while capturing some of the funding-cost savings as margin.
The bank typically captures 10-25% of the cut as widening margin and passes through 75-90% to depositors. Less competitive banks capture more; aggressive online banks pass through more.
Historical pass-through: 2019-2020 and 2024-2025 cycles
| Fed cycle | Total Fed cut | Marcus HYSA total drop | Pass-through ratio |
|---|---|---|---|
| 2019 mid-cycle | -75 bps (over 3 cuts, Jul-Oct) | ~-65 bps | ~87% |
| 2020 emergency | -150 bps (March 2020, 2 cuts) | ~-130 bps within 8 weeks | ~87% |
| 2024-25 normalization | -100 bps (Sep-Dec 2024) | ~-90 bps | ~90% |
The 75-90% pass-through ratio at top online HYSAs has been remarkably consistent across cycles. Plan around it.
Worked example: $100K through a typical cutting cycle
Starting HYSA APY: 4.25%. Fed cuts 25 bps every quarter for 4 quarters (100 bps total), then pauses.
| Quarter | Fed funds target | HYSA APY (90% pass-through) | Year interest on $100K at that rate |
|---|---|---|---|
| Q1 (today) | 4.75% | 4.25% | $4,334 |
| Q2 (-25 bps) | 4.50% | 4.03% | $4,103 |
| Q3 (-25 bps) | 4.25% | 3.80% | $3,867 |
| Q4 (-25 bps) | 4.00% | 3.58% | $3,637 |
| Q5 (-25 bps, pause) | 3.75% | 3.35% | $3,403 |
By Q5, your $100K HYSA is producing $3,403/year of interest, down from $4,334 at start. The cycle stripped $931/year of income off the same balance — about 22% of the year-1 interest.
What this means for your money
If you can see the cutting cycle coming, lock now. A 3-year CD or 3-year MYGA issued today at 4.40% or 5.30% holds that rate for the full 3-year term, even as new HYSAs drop to 3.30-3.50%.
Three-year cumulative interest on $100K through the cycle above:
| Instrument | 3-yr blended APY | 3-yr interest on $100K |
|---|---|---|
| HYSA (drops through cycle) | ~3.85% | ~$12,000 |
| 3-year CD locked at start | 4.40% | ~$13,800 |
| 3-year MYGA locked at start | 5.30% | ~$16,750 |
Locking the 3-year MYGA at the start of the cycle wins by ~$4,750 over staying in HYSA, before tax-deferral compounding adds another $700-$900 in a 24% bracket.
The timing problem
The market prices in Fed cuts months before they happen. By the time the Fed actually cuts, 3-year CD and MYGA rates have already dropped 30-60 bps from their peak. To capture the best lock-in rate, you need to act when the bond market starts pricing cuts — not when the cuts actually arrive.
Signals to watch:
- Fed dot plot shows median dot moving down.
- 2-year Treasury yield drops aggressively (the most sensitive market measure of expected Fed policy).
- Fed Chair language shifts from "appropriate to firm" to "data-dependent" to "approaching the time to ease."
- CD curve un-inverts (5-year CDs start paying more than 1-year CDs again).
When 2-3 of these are firing, the lock-in window is open.
When the answer changes
- You are at a low-pass-through bank. If your HYSA APY barely moves on Fed action, you have a different problem: the bank is structurally underpaying. Move the money.
- The Fed is in an emergency cutting mode. In 2008 and 2020, the Fed cut by 100+ bps in a single meeting. Pass-through happens within days, not weeks.
- The bank promo period is active. Some banks pay an introductory APY that ignores Fed moves for the promo window (typically 3-6 months). Read the small print.
Common mistakes
- Waiting for the first Fed cut to land before acting. By then, CD and MYGA lock-in rates have already dropped 30-60 bps.
- Assuming your HYSA rate is "guaranteed" through the year. It's not. The disclosure says "variable" because it's variable. Banks can and do change the rate any business day with no notice.
- Locking everything at once. A 3-5-7 year MYGA ladder smooths the lock-in timing across the curve and reduces the impact of getting the entry timing wrong.
- Ignoring the size of the cycle. A 25-bp cut is noise. A 200-bp cutting cycle is a major income event. The bigger the cycle, the more locking matters.
- Switching HYSAs to chase 10 bps. The 1-3 day ACH transfer costs a few days of interest. Switch when the spread is 50+ bps or when the cycle clearly turns; not for trivial bps differences.
What to do next
Check the current Fed funds target and the consensus for the next FOMC meeting. If the market is pricing cuts within 6 months, the lock-in window is open today, regardless of whether the Fed has actually moved.
For $50K+ in HYSA with a 3+ year horizon, compare against current 3-year MYGAs at 5.30-5.50% locked. The lock-in usually wins by $1,500-$5,000 per $100K through a typical cutting cycle. See should I move from HYSA to CD when rates fall and HYSA vs MYGA for 3-year money.
Frequently asked follow-up questions
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Disclosure
This article reflects publicly available HYSA, CD, and annuity rate information approximate to the date above. High-yield savings rates are variable and change frequently — often weekly. Always confirm current rates directly with the institution before opening or transferring. This is general educational content, not a personalized recommendation, solicitation, or offer of any specific product. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated carriers in the fixed-annuity market; Goldstein & Co. LLC is not a bank, broker-dealer, or registered investment adviser. HYSAs and CDs are deposit products of FDIC-insured banks or NCUA-insured credit unions; MYGAs and other annuities are insurance contracts backed by the issuing carrier and state guaranty associations. FDIC and NCUA insurance limits are typically $250,000 per depositor per institution per ownership category. Tax discussion reflects federal law as of 2026 and is subject to change; consult a tax professional for your situation.