President Trump is someone who isn’t afraid of conflict. He’s clashed with a number of major players in the political space through the years. And the animosity between him and former Federal Reserve chair Jerome Powell often bordered on comical.
Trump frequently badgered the former Fed chair to lower interest rates. But Powell held his ground during his tenure, opting to rely on economic data rather than pressure to make interest rate decisions.
Meanwhile, Kevin Warsh took office as Chair of the Federal Reserve on May 22, succeeding Powell. And not surprisingly, Trump has been putting the pressure on him for the Fed to drastically cut interest rates to spur economic growth and lower borrowing costs.
But current economic conditions make a near-term rate cut unlikely. That could not only make Trump unhappy, but also have a big impact on Social Security checks.
Why Fed rate cuts matter for Social Security
Each year, Social Security benefits are eligible for a cost-of-living adjustment (COLA) that’s based on third quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When inflation rises to a notable degree, benefits typically receive a larger COLA.
The Federal Reserve’s interest rate decisions can influence that equation, even though the Fed does not set Social Security COLAs directly.
Higher interest rates generally slow economic activity by making borrowing more expensive for consumers and businesses alike. Lower rates, on the other hand, can encourage spending, investment, and borrowing. And if consumer demand increases quickly following a reduction in borrowing costs, inflation can rise.
A prolonged period of inflation — particularly during the third quarter of the year — could lead to a larger Social Security COLA in 2027. After this year’s meager 2.8% raise, a lot of seniors are hoping to see their monthly benefits increase more substantially in the new year. A rate cut could lend to that.
A rate cut is unlikely, but Social Security’s COLA isn’t doomed
The primary reason a rate cut is unlikely during the Fed’s next meeting boils down to current inflation readings. In April, the broad CPI rose 3.8% annually, while the CPI-W rose 3.9%. Those levels are way above the Fed’s target 2% inflation rate over the long run.
Cutting rates at this point would be an almost ridiculous thing for the Fed to do, especially since many economists think inflation will continue to be elevated as the Iran conflict remains unresolved. Warsh, however, will likely continue to face much of the pressure Powell did during his stint as Fed chair.
Trump’s reasoning for lower rates is to promote a thriving economy. But the general consensus at the Fed is that now’s just not the time. Whether that ends up hurting Social Security recipients and their upcoming COLA is still to be determined.
Of course, seniors on Social Security, like consumers across the board, can benefit from lower borrowing costs. But until inflation starts retreating, the Fed is unlikely to budge, no matter how much pressure President Trump opts to apply.
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