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Why stocks could plunge 15% if the Fed shocks the market

With the Federal Reserve meeting getting underway on Tuesday, one strategist warns that a surprise rate hike will cause a huge amount of turmoil, both in the U.S. and around the world.

While Larry McDonald of ACG Analytics believes that it is unlikely that a September rate hike will occur, he predicts that a surprise hike would spur the U.S. dollar, which, in turn, would cause debt troubles worldwide.

"The reason why the Fed has been trapped all year is if they try to hike, you get a surge in the dollar," he said Monday on CNBC's "Trading Nation." "Because they kept interest rates so low for eight years, there's $8 or $9 trillion of commodity debt, of emerging markets debt and of oil debt that have been issued out that are dollar sensitive."

As the Fed raises rates, the dollar becomes a more attractive holding, compared with other global currencies. Meanwhile, a rising dollar generally hits commodity prices, making it harder for commodity companies to pay back their loans, and also makes it harder for emerging market countries and companies to repay debt denominated in dollars.

"If they were to [raise rates], all that credit risk would be at substantial downside, and that would create a lot of volatility in the market," added McDonald. "I think we'll be down 10 or 15 percent pretty quick."

But not everyone agrees that markets would be hit hard should the Fed raise rates. Zachary Karabell, head of global strategy at Envestnet, believes that given the caution with central banks around the world, global assets will see minimal effects from the hike.

"Once that dust settles, you're left with a 50-basis point short-term interest rate that is likely to have minimal, if any, impact on the 10-year and global interest rates in a world of central bank easing," said Karabell.

"The arc is relatively clear that it's going to happen at some point, barring massive disruptions," he added.

The Fed will announce its decision on Wednesday. According to CME Group's FedWatch tool, traders see a 15 percent chance of a hike.


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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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