Fed Rate Cuts Look Less Likely in 2026 and Social Security Is About to Feel It

When inflation surged in the wake of the pandemic, the Federal Reserve had to act quickly to keep prices from continuing to soar. The central bank’s solution was to raise its benchmark interest rate, which, in turn, drove up the cost of borrowing substantially.

Cooling inflation, on the other hand, led the Fed to cut rates three times in 2025. And many economists expected the Fed to continue making rate cuts in 2026.

But that hasn’t happened yet. Here’s why, and how it could impact Social Security recipients.

Why Fed rate cuts are now less likely in 2026

The Fed typically cuts interest rates under a few key circumstances:

• Steadily cooling inflation
• Rising unemployment rates
• Weak economic growth

But consumer prices have been surging following the Iran conflict, mostly in the realm of oil and gas.

In April, the Consumer Price Index rose 3.8% on an annual basis. That’s well above the Fed’s preferred 2% inflation target over the long run.

Now that uptick in higher costs may be temporary. If the Iran conflict settles down, prices could start to come down, at which point the Fed may be inclined to lower interest rates.

But if consumers keep spending despite higher costs, the Fed is less likely to make cuts. And while many consumers are feeling less confident in the economy these days, the unemployment rate is low, making rate cuts less necessary.

How the Fed’s decisions impact Social Security

The Fed does not have a direct impact on Social Security benefits. Those benefits are calculated based on workers’ earnings. And the program’s cost-of-living adjustments (COLAs) are based on inflation readings.

Specifically, COLAs are pegged to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the broader Consumer Price Index.

Now if the Fed doesn’t cut rates in the near term, here’s what could happen:

• Consumer budgets could start to buckle under the weight of higher costs.
• Consumer confidence could fall even more.
• Consumer spending could decline during the third quarter of the year.

If all of these things happen, and there’s a dip in the CPI-W in the months of July, August, and September, Social Security recipients could end up with a smaller COLA in 2027. And that could cause many seniors a world of financial strain.

That said, it’s important to realize that even if the Fed continues to pause its rate cuts, there’s no guarantee that consumer spending will decline. So an absence of rate cuts doesn’t automatically mean lower inflation levels and a smaller 2027 COLA.

All told, there are a lot of different factors at play that will dictate what next year’s Social Security raise amounts to. And we won’t really have a good handle on that COLA until third quarter inflation data gets reported.

For now, seniors on Social Security who are hoping for a larger COLA may want to temper their expectations. Anyone hoping for a big raise should find other ways to boost their income, whether by working part-time or investing spare money in assets that pay on a regular basis.