In December, the Federal Reserve cut its benchmark interest rate for the third time this year. The move was not unexpected, but what’s a little less clear is what the Fed intends to do in 2026.
If you’re someone who collects Social Security, you may be wondering how an additional rate cut on the part of the Fed might impact your COLA. The answer is, your 2026 COLA won’t change, no matter what. That 2.8% increase is already set in stone.
But the Fed’s actions in the coming years could have a big impact on future COLAs, albeit an indirect one.
How Social Security COLAs are calculated
Social Security COLAs are based on inflation — not interest rates. They’re calculated based on third quarter changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
What the Social Security Administration does is take the average CPI-W reading for July, August, and September and compare it to the same period the year before. If there’s a rise in the CPI-W, Social Security benefits get a COLA. If inflation is flat or negative, there’s a 0% COLA. There’s no such thing as a negative COLA.
How interest rates influence COLAs
The Fed’s interest rate cuts and hikes do not have a direct impact on Social Security COLAs. But they do tend to influence how inflation trends.
When the Fed cuts rates, it tends to stimulate the economy, leading to higher prices and higher levels of inflation. And if inflation increases, it could pave the way to higher COLAs.
Will the Fed cut interest rates again?
After its last meeting in December, the Fed signaled that it may be looking to cut interest rates once in 2026.
The Fed also issued a statement saying, “The Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. “
Granted, this is pretty boilerplate language for the Fed. And it’s the Fed’s job to constantly monitor economic activity to determine its interest rate policies.
Remember, the Fed’s goal is to achieve a steady, healthy economy. The central bank can adjust interest rates upward or downward as it sees fit to achieve that goal.
Interest rate hikes are unlikely in 2026. A more likely scenario is at least one rate cut as the Fed suggested. But some economists think a single rate cut may be a conservative prediction.
Following the Fed’s last meeting, Preston Caldwell, senior economist for Morningstar Research Services LLC, said “I expect two rate cuts next year. So that’s one more than the Fed. But altogether, through 2027, I expect an additional three rate cuts that year. So that would be five rate cuts altogether in 2026 and ’27 by our forecasts, versus just two expected over that two-year period from the Fed.”
If the Fed cuts interest rates more than once in 2026, it could drive inflation upward, leading to a larger Social Security in 2027. But at this point, that’s still a pretty big “if.”
Either way, though, your 2026 COLA is what it is at this point. Nothing the Fed does will change that 2.8% increase.
Top Gaining Stocks
Top Losing Stocks