There’s been a lot of pressure on recently appointed Federal Reserve Chair Kevin Warsh to cut interest rates. But with inflation moving in the wrong direction, the obvious move during today’s Fed policy meeting was to leave rates unchanged at 3.50% to 3.75%.
The Fed has long maintained that it likes to target a 2% inflation rate over time. The central bank says that level is most conducive to long-term economic stability.
In May, the Consumer Price Index (CPI) rose 4.2% on an annual basis. Core inflation rose 2.9% year over year, and the most recent Personal Consumption Expenditures Price Index rose 3.8%.
Much of the recent inflation trend boils down to higher oil prices stemming from the Middle East conflict. But if that finally settles down, oil prices could fall, and inflation levels could follow suit.
That doesn’t mean the Fed’s next move will be a rate cut. But a holding pattern could make sense for a period of time.
How the Fed’s interest rate decisions impact Social Security
The Federal Reserve’s interest rate decisions do not directly impact Social Security’s cost-of-living adjustments, but the Fed’s moves could have an indirect impact.
When the Fed raises rates, it can make borrowing more expensive for consumers. And when borrowing costs rise, consumers often respond by reducing spending. That sort of pullback could lead to lower inflation readings and smaller Social Security COLAs to follow.
The opposite could happen as a result of Fed rate cuts. When it’s cheaper to borrow, consumers tend to spend more, which could lead to higher inflation readings and larger COLAs.
Given that the Fed just paused rates, the indirect impact on next year’s Social Security COLA should be pretty neutral.
Social Security COLA could rise to highest level in four years
The past three Social Security COLAs came in at 3.2%, 2.5%, and 2.8%, respectively. Many seniors are hoping 2027’s raise will be significantly higher. And if inflation remains elevated, they might get their way.
Following May’s CPI, the nonpartisan Senior Citizens League projected that 2027’s Social Security COLA would amount to 3.8%. Even more recently, independent Social Security analyst Mary Johnson increased her 2027 Social Security projection to 4.7%. And even that may be a lowball number.
“There’s a considerable likelihood that it’s going to climb even higher than 4.7% as data continues to come in, especially on the gasoline prices,” Johnson said, as reported by CNBC.
Seniors hoping for a larger 2027 Social Security COLA may not realize they’re also rooting for inflation to stay elevated. That means they may be indirectly rooting for a Fed rate hike. Seniors with money in savings accounts and certificates of deposit can benefit from higher rates. Those who rely heavily on borrowing, though, could get hurt by a rate hike later in 2027.
Social Security COLAs are based specifically on third quarter inflation data, so it’s still too soon to say with certainty how high or low next year’s raise is going to be. And in that regard, seniors who rely on those benefits are effectively in the same boat as the Fed in that it’s hard to take action until more information becomes available.
Top Gaining Stocks
Top Losing Stocks