Stock market investors are ready for the first US Federal Reserve interest rate hike in nearly a decade this week, but they may not be fully prepared for all of the nuanced remarks likely to accompany that announcement.
If the Fed lays out an aggressive schedule of future rate increases, stock markets could become very volatile and even plummet, say strategists who expect a market-calming central bank announcement detailing policymakers’ patience.
Activity in the options market suggests stock traders are being cautious ahead of the Fed policy meeting on 15 and 16 December, and options expiry at the end of next week could amplify volatility.
"If...(policymakers) came out saying that over the next two years they will raise by ‘this’ much, that would be very destabilizing," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago.
Even so, traders hoping to profit on the Fed's expected statement lack a playbook. The markets haven’t been through the current scenario of a rate lift-off after years in which the central bank's short-term interest rates have been locked near zero.
That could partly explain the jittery trading on Wall Street last week, during which volatility has risen and the benchmark S&P 500 dropped 3.5 per cent.
A slew of economic data due to be released before the Fed meeting, including readings on growth in manufacturing, industrial production and consumer prices, could cause some choppiness if traders take any robust data as a sign that the Fed may be more aggressive with rate rises.
Oil prices continued to fall last week and that looks set to continue.