I would also add that part of the reason why the spread is so high currently is because no one is ever going to deposit money if the spread is close to historic norms. I mean, who in their right mind would bother with putting money in the savings account if the rate is at 0%? At that rate, you can put it into the S&P 500 and still have a 4%+ cushion because you will get dividends.

You can still find some 1Y CD rates at 2.00%. That is a full 2% above fed funds which is quite high historically. This would lead you to believe that the market thinks Fed Funds are too low. And there is quite a spread between 5-year CDs and 1-year CDs. Banks do believe rates will go up at some point and are paying somewhat of a premium for them.

In 2006-2007 (I think that was the time frame), when Fed funds was at 5.25%, most banks were offering 1-year rates at about the same level. Certainly you found some deals, but the spread was much smaller than it is now. And in most cases, 5-year rates were actually lower, thus giving an inverted yield curve, an indication of rates more than likely going down. And of course we know what happened.

Still, I think online high yield savings accounts are worth it. Like mentioned above, even small differences in the interest rate add up over time and I think online accounts are a great way to save.

Note that most banks hold your deposit a few days to verify that you aren’t trying to commit fraud by saying you have X amount in the source account when you don’t. The good part is that as soon as your account is open, your deposit will start earning interest even though your deposit is on hold.

There’s also a discount window, where banks can borrow funds from the federal reserve using the discount rate, which the federal reserve sets. These funds are meant to be short term loans, and are used to tied institutions over very short periods of time. These funds too, are not used for lending.

The reason why lowering the fed funds rate spurs economic lending and thus activity is because the lower theses short term rates, the less the cost for banks to borrow from different banks and through the fed when they are in need of capital. This, in turn means they can lend out more of the money they already have (ie, take on more risk). When there’s more supply in the market, the rate usually goes down to reflect this.

So, yes, which the rate we care about (mortgage rates, savings interest rates etc) are tied somewhat to the fed rate, it only indirectly effects it, which is surprising for many people.