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Fed decision is a ‘recipe for volatility’: Strategist

The market's biggest event of the week is on tap for Wednesday afternoon, when the Federal Reserve releases its latest policy statement and forecasts, and Chair Janet Yellen follows it up with a news conference.

According to some strategists, the Fed's words are very likely to disrupt the market's recent quiescence.

"We think the Fed is going to inject some volatility here," Convergex's chief market strategist, Nicholas Colas, predicted Tuesday on CNBC's "Power Lunch."

With the magnitude of the S&P 500's moves (also known as historical volatility) falling precipitously since the beginning of February, and expected volatility dropping as well, markets have clearly calmed down considerably.

Not only has the market become more calm, but the market's correlation with oil has fallen, Colas points out. This is a significant development, because it "will mean other fundamental factors are in play."

When it comes to the Fed specifically, the strategist notes that "we've got a big disconnect between what economists are thinking for the Fed, and what fed funds futures are thinking, and fed fund futures are thinking much less of a chance for rate hikes this year."

Translation: There may be a significant risk is that the Fed strikes a more hawkish tone than expected.

"Put it all together and stir it in the pot — you've got a recipe for volatility," Colas said.

Others, such as currency strategist Boris Schlossberg, also see a more hawkish-than-expected Fed, which is the reason Schlossberg recommends being long the U.S. dollar into the meeting.

Read MoreThe Fed could shock the market, says strategist

While options expert Dennis Davitt doesn't necessarily disagree that volatility could be set to rise, he rejects the notion that increases in volatility will come "from the Fed, because they've already started into motion" their tightening process.

"I think there are other factors in the market which could add as much, if not more, volatility," Davitt, of Harvest Volatility Advisors, said Tuesday on "Power Lunch."


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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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