The Federal Reserve cut interest rates by a quarter of a percent Wednesday and signaled half as many rate cuts in 2025 as initially forecast. Economists say these changes could be in anticipation of Trump’s expansionist monetary policy, promises to raise tariffs, and a crackdown on immigration, which could be inflationary.

President-elect Donald Trump has continued his streak of making economic waves more than a month before he sets foot in the Oval Office again. Despite sentiment that Trump will stimulate the economy, his impending policies promising high tariffs and tax cuts threaten to hike inflation. Those economic dynamics may have nudged the Federal Reserve into adopting a more cautious stance.

The central bank cut its key interest rate by 25 basis points Wednesday, its third cut in 2024, sending the federal funds rate to 4.25% to 4.5%. Accompanying the cut was officials’ prediction that the Fed would halve the number of rate cuts in the coming year from what it expected in September, which sparked a severe selloff; the S&P 500 closed down 3%, its worst Fed-day since 2001. But the Fed’s caution could also be a signal of looming uncertainty and that some officials are waiting to see what the Trump Administration will roll out.

“We expect significant policy changes,” Powell said Wednesday in a press conference. “We need to see what they are and what effects they have.”

While the Fed’s widely expected cut was a continuation of its goal to continue to keep inflation around 2% and maintain maximum employment, some experts say those goals could run counter to Trump’s proposed tariff and immigration policies, which would likely be inflationary and tighten the labor market.

“Pretty much every prong of [Trump’s] policy looks like it’s going to threaten their mandate,” Julia Coronado, founder and president of MacroPolicy Perspectives and former Fed economist, told the Financial Times.

“We are not in Trump 1.0 any more. This is Trump 2.0,” she added. “We have above-target inflation and we need to get ahead of this.”

Question marks over Trump’s tariffs

Powell was the first to admit the rate cut, despite signaling for months the Fed was becoming more cautious, was also a way for the bank to position itself ahead of an administration with question marks over its fiscal policies.

“It puts us in position, when we finally do see what the actual policies are, to make a more careful, thoughtful assessment of what might be the appropriate policy path,” Powell said Wednesday. “You don’t rule anything in or out in this world.”

Goldman Sachs warned last month that Trump’s proposed tariffs on imports from China, Canada, and Mexico would increase inflation by nearly 1%, calculating that each percentage point of Trump’s proposed increase on duties would raise personal consumption expenditures, the Fed’s preferred measure of inflation, by 0.1%.

Trump-Vance transition team spokesperson Brian Hughes told Fortune Trump would “implement economic and trade policies to make life affordable and more prosperous for our nation.”

Goldman Sachs analyst David Mericle said the Fed’s decision to halve its forecasted rate cuts was in part a way to brace for the impact of tariffs on inflation.

“The [Federal Open Market Committee] might nonetheless choose to be more cautious out of concern that delivering too many cuts could look inappropriate in hindsight if tariffs boost inflation,” he told investors in a note Wednesday, “even if this only means a few awkwardly high months, and might regret them if the White House goes ahead with a larger universal tariff.”

Speculation over the Fed’s next moves may also be cleared up by how aggressive Trump is on day one, according to Francesco Bianchi, a macroeconomics professor and economics department chair at John Hopkins University. Should Trump immediately implement higher tariffs or extend his 2017 tax cuts, the Fed may grow more wary of inflation.

“It will be very hard for the Fed to justify interest rate cuts unless it sees some signs that the economy is really struggling,” Bianchi told Fortune.

Trump and Powell’s complicated relationship

If Trump’s first term is any indication, Powell and the incoming president’s rocky relationship could provide another variable in the Fed’s decision making should they continue to quarrel. Trump appointed Powell in 2018 but will only have one year with him as Fed chair before Powell’s term ends in May 2026. While Powell was Trump’s pick for the position, the then-president grew frustrated with the Fed’s pushback on his desire for an expansionary monetary policy.

Trump chastised the Fed over Twitter in his first term, tweeting at Powell 100 times following his 2018 appointment. In a study macroeconomics professor Bianchi conducted during Trump’s first term, he and colleagues found evidence Trump’s tweets had a “significant” impact on trading and was associated with a substantial dip in fed funds futures, which are considered a key insight into market sentiment about Fed policy. According to his findings, the trend could foreshadow the Fed bending to the markets in the early days of Trump’s second term.

“It’s possible that if President Trump starts hammering the Fed that rates are too high, markets might start revising the expectations about future rates,” Bianchi said, “and they might put some pressure on the Fed on actually delivering on these lower rates.”

For now, Powell has been publicly cautious about the Fed’s next move, optimistic about the economy, and has stayed politically neutral.

“When the path is uncertain you go a little bit slower,” he said this week. “It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

Economists say the Fed is bracing for ‘Trump 2.0’ and a deluge of fiscal policy shakeups