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The Fed cut rates by 0.25% in December 2025 with a 9-3 vote split and signaled future cuts may pause.
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Early projections suggest the 2027 Social Security COLA could fall to 2.3% to 2.6% range.
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A 2.3% COLA would mark the smallest Social Security increase since 2020.
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The Federal Reserve had its last meeting of 2025 on December 10 and, as FedWatch predicted, the Central Bank delivered its third straight interest rate cut. This time, rates dropped by a quarter point, which means we go into 2026 with the benchmark rate in the 3.50% to 3.75% range. This reflects a three-quarters of a percentage point drop from the start of the year, when the benchmark rate was set 4.25% to 4.50% target rate in January.
The Fed was split in its decision to cut rates, with a 9-3 vote in favor, and the rate cut may be the last for a while as the post-meeting statement said “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
The Fed was also acting with incomplete data, as the prolonged government shutdown earlier this year meant it had to rely on research from outside sources, including a report from payroll provider ADP, as unemployment and inflation data from government sources were delayed.
Still, the decision will impact many aspects of the economy — and it could mean that retirees are in for a COLA surprise in the upcoming year.
For many retirees who rely on Social Security benefits as a primary income source, the Fed’s decision is most notable because of what it could mean for the Cost of Living Adjustment (COLA) that applies to Social Security benefits. Specifically, the Fed’s choice to reduce rates could mean that seniors are going to get a lower benefits increase in 2027 than the amount they’ve become used to.
The Federal Reserve’s rate decision does not directly impact the amount of Social Security benefits retirees collect, as the formula used to calculate these benefits increases is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When CPI-W data from the third quarter of the year demonstrates rising prices, retirees get a COLA equal to the year-over-year percentage increase.
However, the Fed’s decision is notable because a key part of the central bank’s core mandate is to keep inflation stable. The Fed has a target inflation rate of 2%, and it sets monetary policy with the goal of both keeping price increases to around this level and maintaining a solid labor market with low unemployment rates.
