Investing.com -- Newly announced tariffs by Trump on Wednesday will likely dampen near-term growth, increase market volatility, and prompt the Federal Reserve to deliver significant rate cuts later this year, according to UBS.

The measures, which introduce a 10% baseline tariff on most imports and steeper “reciprocal” tariffs for specific trading partners, mark a sharp escalation in U.S. trade policy.

Tariffs will hit imports from China (34%), the EU (20%), Japan (24%), and Switzerland (31%), with exemptions for USMCA-compliant goods and select products like semiconductors, pharmaceuticals, and energy.

Equity market futures sold off following the announcement, with the S&P 500 Futures retreating 3% after Trump’s speech and Nasdaq 100 Futures falling 3.4%.

Bond yields also moved lower, with investors “seeming to focus on risks to growth rather than the inflationary impact of tariffs,” said Mark Haefele, Chief Investment Officer of UBS Global Wealth Management.

According to the strategist, the effective U.S. tariff rate may rise from 9% to around 25%, the highest level since World War II.

Haefele believes that the “near-term shock and associated uncertainty is likely to drive a near-term slowdown in the U.S. economy and reduce full-year 2025 growth to closer to or below 1%.”

The White House is expected to face legal and political resistance. Trump announced the tariffs using the International Emergency Economic Powers Act (IEEPA), which has not been used before for such broad changes to economic policy.

“Furthermore, businesses are likely to intensify lobbying efforts. And political pressure to ease tariffs could mount as economic costs rise,” Haefele added.

While UBS’s base case assumes that tariffs will be negotiated down over time, this process may take months and, in the interim, the principle of “reciprocal” tariffs could fuel further escalation.

The bank’s base case scenario assumes rate cuts of 75 to 100 basis points (bps) over the remainder of 2025.

On the other hand, in a downside scenario, where tariffs remain in place for more than three to six months, or potentially increase, the U.S. could tip into a recession, Haefele warns.

The firm assigns a 30% probability to this scenario, which could lead to “rounds of retaliation from trading partners” and “even greater rate cuts from the Fed.”

For investors, Haefele sees gold as a strategic hedge.

“We expect gold, now above $3,000/oz, to continue serving as a hedge against geopolitical and inflation risks,” he noted, targeting $3,200/oz by year-end.

On equities, the strategist expects volatility to persist but believes that “the market will end the year higher,” with opportunities in AI, longevity, and power and resources themes.

Meanwhile, although the dollar initially strengthened, Haefele sees the potential for longer-term weakness if growth disappoints and rate cuts accelerate.