The Aftermath of Tariff War: A New Paradigm for U.S. Consumer Sentiment and Economic Outlook

Signs of Recovery Amid Uncertainty, But Structural Concerns Remain

Preliminary data from the University of Michigan's June Surveys of Consumers indicates a potential turning point for the U.S. economy. After six consecutive months of decline, the Consumer Sentiment Index surged by 15.9%, which is an undeniably positive signal. However, questions remain as to whether this rebound reflects a structural shift or a temporary relief.

A Stunning Rebound in Sentiment: Superficial Recovery or Substantive Improvement?

The preliminary Consumer Sentiment Index for June jumped to 60.5, up from 52.2 in May. The final figure will be released on June 27, but the preliminary results already indicate a substantial shift. Notably, the improvement was broad-based, seen across age groups, income levels, political affiliations, and regions.

That said, the context matters. The index remains 20% below levels seen after the post-election surge in December 2024. More importantly, as Director Joanne Hsu noted, the recovery reflects consumers being “somewhat calmed from the shock of extremely high tariff announcements.” This suggests that the improvement may reflect adaptation to a new policy environment rather than actual economic improvement.

Expectations for both short- and long-term business conditions have risen sharply, closely tied to the perception that tariff pressures may be easing. Yet, consumers continue to report a “broad awareness of downside risks” to the economy. Across key metrics including business conditions, personal finances, major purchases, the labor market, and equities, sentiment remains significantly lower than in December 2024.

Conflicting Signals in Inflation Expectations: Short-Term Improvement, Long-Term Concern

Inflation expectations provide a more nuanced picture. One-year-ahead expectations dropped sharply from 6.6% to 5.1%, and five-year expectations ticked down from 4.2% to 4.1%—a three-month low.

This is welcome news for the Federal Reserve, particularly given Chair Jerome Powell’s repeated emphasis on the importance of “anchoring inflation expectations". However, expectations remain elevated relative to 2024 levels, indicating continued public concern that tariffs will contribute to future price pressures.

This captures the structural dilemma facing the U.S. economy. Tariff-induced inflation is not simply a one-time event, it also actively shapes consumer expectations. In fact, year-to-date surveys show that 48% of consumers mentioned tariffs unprompted, many believing they will drive future inflation.

Mixed Signals in the Treasury Yield Curve

The U.S. Treasury market illustrates the complexity of the current environment. As of June 13, the 10-year yield surpassed 4.4%, up from the previous day and still significantly higher than one year ago, despite having declined over the past month.

More striking is that long-term yields have risen even after the Fed began cutting rates in late 2024—an anomaly compared to the past seven rate-cutting cycles since the 1980s, where yields generally fell within 100 days of the first cut.

This paradox stems from a combination of factors. First, optimism about future growth, driven by expectations around Trump-era tax cuts and deregulation. Second, constrained monetary policy expectations—investors increasingly believe that inflation from tariffs may limit the Fed’s room to ease further. Third, a growing uncertainty premium, as volatile policies lead investors to demand higher risk compensation.

The Fed’s Dilemma: Balancing Dual Threats

The Federal Reserve now faces an unprecedented dilemma. Unlike typical policy trade-offs, tariffs are simultaneously producing both inflationary and deflationary pressures.

The Fed’s March Summary of Economic Projections revised 2025 GDP growth down from 2.1% to 1.7%, while raising core inflation forecasts from 2.5% to 2.8%. In essence, the Fed is now formally acknowledging a stagflation scenario. Its May FOMC minutes explicitly stated that "uncertainty around the economic outlook has increased," noting elevated risks of both “higher unemployment and higher inflation.”

Labor market data still looks solid on the surface. The unemployment rate holds at 4.2%, and May nonfarm payrolls exceeded expectations, rising by 139,000 versus the forecasted 125,000. However, in a recent press briefing, Chair Powell warned that "if large-scale tariffs persist, the risk of rising inflation, slowing growth, and rising unemployment increases."

Fed Funds futures markets now price in a near-100% probability of a pause in June. A first rate cut is expected in July, but even that hinges on the true economic impact of the tariff regime—an open question at this point.

Conclusion: A Difficult Path Toward a New Economic Paradigm

The improvement in June’s Consumer Sentiment Index is certainly encouraging. But it does not suggest the resolution of deeper structural problems. On the contrary, the current landscape signals a fundamental shift in the U.S. economic paradigm.

This transition will inevitably involve trial and error. The economic impact of tariffs remains ambiguous. Monetary policy faces unprecedented constraints. Households and businesses alike are scrambling to adapt to an unfamiliar environment. Going forward, two questions will define the economic outlook. First, how will the tariff policy ultimately take shape. And second, how quickly can economic agents adapt to these changes,

So far, the U.S. economy has shown notable resilience. Yet, structural vulnerabilities are also emerging—rising income inequality, growing policy uncertainty, and global supply chain realignments could all weigh on long-term growth potential.

Ultimately, the moment calls not just for tactical policy tweaks but for deeper structural reform. This is not simply about tariffs or interest rates. It is a strategic question about what role the U.S. intends to play in the 21st-century global economy.

If history is any guide, this transition will not be smooth. But the U.S. economy has repeatedly demonstrated its ability to turn crises into opportunities. This time may be no different.