CAMBRIDGE – Although this year is not even half over, it is already likely to feature in history books as one of extreme policy-induced volatility, not only in financial markets but also in terms of economic narratives and international relations. But where it will lead remains to be seen. Are we witnessing the fragmenting of the US domestic and international order, or just a bumpy ride toward a beneficial rewiring of both?

We have already seen the S&P 500 nearly drop into a bear market (a decline of 20 per cent from the recent high), only to climb back and end up broadly unchanged for the year. Bond yields have been all over the place, partly owing to a stomach-churningly volatile macroeconomic outlook. The probability of a US recession started the year below 10 per cent, peaked in April at nearly 70 per cent, and fell back below 40 per cent just a month later.

And remember, the United States is not only the world’s largest economy. With mature institutions, deep financial markets, and as the issuer of the global reserve currency, the US is who others entrust with their own savings and wealth. What happens in the US does not stay there. No wonder “uncertainty measures” for companies and households have been off the charts this year. As the Bloomberg columnist Justin Fox observes, “uncertainty has never felt this uncertain.”

The immediate cause is the volatility in US tariff policy, which has provoked reactions from other systemically important countries. But trade is not the only issue. As the US and others push the limits on debt and deficits, the bond vigilantes have been roused from their slumber. In the process, traditional US equity-bond-currency correlations have been undermined, and recent attempts to shrink or reform the public sector seem to have produced more questions than answers.

Against this backdrop, one finds a remarkably wide range of views among professional economists. For example, some see the recent thaw in US-China trade tensions as marking a fundamental shift in the Trump administration’s approach (prompted by fear of “empty shelves”), whereas others see it as only a temporary pause that will be followed by more difficulties.

The same applies to US-Europe trade relations. Some see Trump’s threat to impose 50 per cent tariffs on imports from the European Union as the start of a tit-for-tat process that will have adverse direct and indirect effects on both economies and the wider world. But, especially with the postponement of the initial deadline, others see it as another sign of the US pursuing an “escalate to de-escalate” strategy.

Looming over these differences is the question of whether the US and global economy are being fundamentally revamped. Has the toothpaste already been squeezed out of the tube, or will today’s turmoil be more like the COVID-19 experience, when we largely returned to where we had started?

Five issues will determine where we go from here. The first is tariffs. The latest twists and turns could imply that US policymakers’ primary motive is to achieve a fairer trading system through the “escalate to de-escalate” approach. If so, this goal should eventually sideline some of the other stated (contradictory) priorities: generating large revenues and significant reshoring of manufacturing.

A second factor will be the bond market. The return of the bond vigilantes has already markedly increased yields on long-dated government bonds, with Japan’s soaring to historic highs. Given the potentially disruptive implications, rising bond yields could act as a preemptive form of discipline; alternatively, markets and economies could become even more vulnerable to sudden dislocations in the cost of borrowing for governments, companies, and households.

The third issue is the clash between economic and national-security considerations. Behind the tariff imbroglio is a tug-of-war between dovish economic officials who support deal making and hawks who feel that short-term pain is necessary to improve America’s security, not least by derailing China’s development. Which side will prevail?

The fourth issue concerns how other countries react. Today’s US policy-induced volatility is leading some to question their long-standing adherence to a US-centered trade and payments system. To what extent has basic trust been eroded, and could America’s loss of credibility accelerate the development of alternative systems?

The last issue is corporate behavior. Will CEOs use this period merely to stock up on inventories, or will they pursue more far-reaching changes? Are they confident in their ability to pass the costs of tariffs on to consumers, and has their view on capital expenditures fundamentally changed?

Once we extend the analysis beyond this year, we confront an even larger issue. Indeed, rather than think of the tariff-induced volatility as the main cause of economic uncertainty, we should see it as an accelerant of bigger structural changes. Some traditional economic tools were already being undermined by structural shifts in the international trading system, the diversification of supply chains, and (in many cases) the prioritization of resilience over efficiency. National security and domestic considerations were already overtaking economic ones. Confidence in institutions, national and multilateral, was already being eroded.

This big-picture framing is important, because it reinforces the notion that the global economy is on a bumpy journey toward an uncertain destination. We could be hurtling toward recession, stagflation, and the fragmentation of global trade and payments systems. Or we could be in the early stages of a Ronald Reagan- or Margaret Thatcher-style rewiring that will eventually bring greater productivity gains, higher growth potential, less threatening deficits and debt, a fairer trading order, and a more stable payments system.

Of course, even the optimists should acknowledge that this is a 50-50 proposition at best. In the meantime, we will all need to muster the resilience to endure prolonged uncertainty, and with it the flexibility to prepare for vastly different future scenarios.

Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania, the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016), and a co-author (with Gordon Brown, Michael Spence, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023). Copyright: Project Syndicate, 2025. www.project-syndicate.org