The Cost Of Chasing Deposit Rates Just Went Up

Less than thirty-six hours after we opined on how to grow deposits without engaging in rate wars, the Federal Reserve raised its key interest rate for the first time since 2023, moving it up a quarter point to a range of 3.75% to 4%. Our argument got a live test overnight.

Over the past two years, the Fed lowered rates 6 times between 2024 and 2025, meant to ease up post-pandemic inflation, and then consistently kept rates fairly steady through early-to-mid 2026, in an attempt to drop inflation to their target 2% (currently ~3.4%).

For community banks, this timing is less than ideal. Many had just started to see a break in what they pay for deposits, after two tumultuous years of competing against de novos and fintechs offering prime rate accounts. The instinct that typically follows a hike like this (including the high likelihood of future hikes, coming soon) is to raise rates, defend the deposit base, and worry about the rest later.

No Longer A Wait And See

Throughout the beginning of this year to now, rates had been held steady, with slow dissent building across earlier Fed meetings about when to execute the next hike. Yesterday, the committee made the move, unanimously. While the Fed’s official statement outlined that while they believed the economy was steady and solid, inflation remained too high, and this hike is aimed at bringing it down.

A notable shift that came with the swearing in of new Federal Reserve Chair Kevin Warsh is the forward guidance that had given banks insight into future rate decisions by Warsh’s predecessors no longer be the norm. Because of this, banks can expect to have much less of an advance warning about future interest rate movements. The path ahead becomes harder to predict, and the need for steady avenues of competing for deposits becomes increasingly more important.

Banks Were Still Catching Up

The small relief that had come with the cost of deposits easing from 2024 to earlier this year is now reversing.

Something interesting happened during that period when the relief was supposed to be underway. During what was a cutting cycle, when the pressure to compete in the deposit rate wars should have been letting up, banks saw growth: CDs and other fixed-term deposits rose from 17% of total deposits in 2022 to 30% by the beginning of 2026, nearly doubling in share. Over this period, the deposit base got increasingly expensive and rate-dependent, rather than the opposite.

On the other hand, checking accounts with little-to-no interest paid shrunk: what was once 26% of deposits in 2022, dropped to around 21% earlier this year. The rate relief that could’ve brought banks a stickier deposit base, instead brought them a more expensive one.

In an August 2026 survey of bank executives, IntraFi reported that 99% of responding bankers expect deposit competition to increase or stay at their current level. The same survey also reported that 68% of respondents expected the Fed to leave interest rates unchanged for the rest of the year.

The Deposit Rate Crossroads

Banks are at a significant crossroads in the deposit rate war. Two paths lead to two vastly different results, and one of them will continue to get more expensive over time.

Option one: keep fighting the fight. Continue trying to match the rate competitors offer, for as long as you can. This path comes with a cost without a ceiling and comes during a time when banks have less cushion than before.

Option two: be ready to capture the account the moment a customer decides to act. Moments like this week’s rate hike create a small window of opportunity where a depositor is paying attention to where their money is extra closely, and maybe even willing to move. That window is constantly lost when the account opening process takes too long, the identity verification gets stalled, or things become too manual.

At Linker, we run KYC, fraud verification, core account creation, funding, and all the communication that follows as one connected flow, opening an account in under three minutes. None of them requires added headcount or a new core. Enable your account opening process to move as fast as the customer's decision to act, especially in a week like this one.

Tuesday’s argument was about the deposits banks lose without ever comparing rates. Today's is about what happens when a rate moves and a bank isn't built to be fast enough to move alongside it and close the account before the customer moves on to compare somewhere else. Both come back to the same fix.