This isn't just an American phenomenon, over here in Australia we have a similar abundance of towns named using Aboriginal words (even our capital city!). While I'm aware of why this is the case over here in Australia, I can't guarantee that it's for the same reason in the US, but as the underlying cause (a settler-colonialist past) is something that both our countries share, there's a pretty good chance that it's the case.

In "Settler colonialism and the elimination of the native", academic Patrick Wolfe puts forward the following explanation for the common use of Aboriginal words in the naming of Australian towns etc.:

On the one hand, settler society required the practical elimination of the natives in order to establish itself on their territory. On the symbolic level, however, settler society subsequently sought to recuperate indigeneity in order to express its difference—and, accordingly, its independence—from the mother country.

(from p. 389, the third page of the above link)

Here Wolfe argues that using native words for the naming of places is a way for a settler colony (which is both lacking in its own history and dependent on its mother country for its culture) to create and maintain its own distinct cultural identity. Let's expand on this a bit by delving into the theory side of nationhood. In order to have a nation, the group of people who comprise it need to all think of themselves as part of the same group, that is distinctly different from everyone else. This is somewhat difficult for settler colonies as they lack both a long past to call back upon, and a cultural identity that is distinct from everyone else (because they begin as a cultural offshoot of their mother country). So with this in mind, what is the one unifying thing which all of the colonists share but nobody else, not even the mother country, shares? The answer is, perhaps unsurprisingly, the land on which they live. Both Australia and America had and continue to have proud traditions relating to the frontier and outback/country, for example the Australian bushman/farmer remains an iconic national figure in the present despite Australia being one of the most urbanised countries in the world. The native history of the land falls under this umbrella, as it's something that only people living on that land, and not those back in the mother country, can draw a connection to.

So where do native peoples figure into all this? You're right in noting the somewhat contradictory nature of this phenomenon in your question, as it relies upon the past existence of the native group on the land, but also their nonexistence in the present (it's hard to claim native cultures as a part of your nation's history when said culture still exists as a separate entity). The removal of native groups from their lands has typically been legitimised through the argument that they have no culture or civilisation and hence have no claim to the land. However a callback to the native past of the land (such as through naming a place after a native group) is only meaningful if people accept that there was a previous culture/civilisation living there whose memory is worth preserving. So this phenomenon is part of a rather cynical process in which the coloniser attempts to eliminate the native and then "honour" their memory after the fact, as a part of their own history.

Although Wolfe's argument is a solid one for thinking about this phenomenon in the past, movements for reconciliation and the recognition of indigenous cultures in more recent times make this a bit more complicated. Some places may be named/renamed using native words out of respect to the groups that lived (or still live) there with the intention of improving relations in the present.

Anyway I hope that sufficiently answers the question for you, let me know if you want more clarification or have any follow-ups.