It's Still All About Europe

The market's wild reaction to the FOMC's announcement yesterday (gold down, dollar up, euro down, T-note and T-bond yields down, equities down, commodities down) begs an attempt to diagnose what is going on. One explanation that seems to make sense is that what the market was really looking for from the FOMC was a QE3, not an Operation Twist 2. Increasing the duration of the Fed's Treasury holdings doesn't do much of anything for the economy, but deciding to no longer pay interest on excess reserves, for example, would have been a clear move to an easier policy stance, and that might have relieved some of the pressures in Europe, or at least so the thinking goes. By not announcing a true easing of monetary policy, the FOMC's announcement could thus have sparked fears that the deterioration in Europe was increasingly likely to result in some sort of economic destruction.