Nobody expected Uncle Ben to take away the punch bowl on Tuesday afternoon – not when the party had taken such a sombre turn of late – but some market participants were clearly disappointed he did not spike it with far stronger stuff. That is the only explanation for wild moves after the Federal Open Market Committee’s scheduled statement on Tuesday afternoon. Short- and medium-dated Treasury yields cratered to their lowest level ever, breaking records set in 2008, while the Dow Jones Industrials plunged and then rebounded after big gains earlier in a 630-point range for the session. Perhaps most incredible of all, currency volatility reached levels most dealers had never seen during their careers as the dollar plunged against the Swiss franc.

With interest rates near zero, all the FOMC could offer was verbiage. Saying that it would keep rates at “exceptionally low levels” through mid-2013 as opposed to the vaguer “extended period”, even with three hawkish dissenters, should have at least maintained a five-hour long relief-rally in equities under normal circumstances. The response indicates that circumstances are anything but normal.

Indeed, the initial reaction was schizophrenic, with currency and Treasury markets bracing for more Lilliputian yields while equity traders who had just seen a year and a half of gains wiped out in a couple of weeks seemed to expect a fresh round of quantitative easing to begin forthwith. If asset values keep sliding then they may well get something even bolder than QE3.

With little evidence that the third time will be the charm and with sovereign debt rather than shaky banks the issue this time, the fiscal bazooka is in any case nearly out of ammo. Markets suggest that monetary thermonuclear weapons, with unpredictable collateral damage, may soon be considered.

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