Where is US economic policy taking us this time?

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.

- Mohamed A. El-Erian

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 towards a beneficial rewiring of both?

We have already seen the S&P 500 nearly drop into a bear market (a decline of 20% 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%, peaked in April at nearly 70%, and fell back below 40% 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.