The Fed Just Held Rates Flat and May Have Set Up the Biggest Social Security Raise in Years

The Federal Reserve left interest rates unchanged on June 17 during Chairman Kevin Warsh’s first policy meeting at the helm of the central bank. But forecasts revealed a more hawkish outlook among policymakers.

Of the 18 other officials serving on the Fed’s rate-setting committee, nine indicated that they expect interest rates to move higher before the end of the year, including six who projected two quarter-point increases.

The shift marks a significant departure from the Fed’s March projections, when no officials said they anticipated a rate hike and the committee’s forecast called for a rate cut in 2026. The revised outlook reflects growing concern over inflation, which recently hit its highest level in three years.

The problem with rate hikes is that they could set the stage for more expensive borrowing. At a time when consumers are already struggling with higher costs, that’s not ideal. But the timing of the Fed’s interest rate pause, even with a potential subsequent hike, could set retirees up for the biggest Social Security cost-of-living adjustment (COLA) in years.

How the timing of Fed rate hikes could impact next year’s Social Security COLA

The Fed does not establish annual COLAs for Social Security. Those raises are based on third quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When there’s an increase in the CPI-W year over year, Social Security benefits go up.

That means inflation over the next few months will play a major role in the upcoming COLA. And if the Fed raises rates, it could lead to a pullback in consumer spending, causing inflation to slow. If that happens, and inflation eases enough, it could lead to a smaller Social Security COLA.

However, the Fed clearly doesn’t seem to be in a rush to raise interest rates. And if it continues on its current “wait and see” path, seniors on Social Security could be in line for a more substantial raise in the new year.

The Fed’s next policy meeting is scheduled for July 28-29. Unless there’s a major increase in inflation, the central bank could leave rates unchanged once again. From there, even if the Fed opts to raise rates at its mid-September meeting, it will be too late for a rate hike to drive a notable change in consumer spending.

It can take weeks to months for the Fed’s rate changes to trickle down to consumer interest rates. If the Fed makes a move in mid-September, it most likely will not be reflected in that month’s CPI-W reading, which is the final piece of the 2027 COLA puzzle.

To put it another way, even if the Fed hikes rates in September and prices start to retreat in October, that won’t impact the upcoming COLA. It might benefit seniors and impact their wallets, but it wouldn’t be something that gets in the way of the substantial 2027 COLA experts are predicting.

What the numbers say now

Following May’s CPI-W, the nonpartisan Senior Citizens League estimated 2027’s Social Security COLA at 3.8%. More recently, independent Social Security analyst Mary Johnson raised her 2027 Social Security projection to 4.7%.

These numbers might sound encouraging to seniors. But it’s important to recognize that a larger COLA is not necessarily a good thing, as it’s indicative of persistent inflation.

That said, the scenario outlined above could end up being the best possible outcome for Social Security recipients. If inflation remains elevated just enough to allow for a large 2027 COLA but then drops steeply in October following a Fed rate hike, seniors might benefit from a generous raise and a gradual decline in prices.

Of course, there’s no guarantee the sequence of events will play out like that. But it’s not off the table given the Fed’s recent stance on inflation.