A surprise from the Fed this week could trigger a market tantrum, says market watcher

Markets expect a rate hike from the Federal Reserve when its policymaking committee meets this week. Anything beyond that could cause a market tantrum, says one market watcher.

There are two market-moving events to watch for at this week's meeting, says Stacey Gilbert, market strategist at Susquehanna Capital Group. The first is any rate hike and the second is forward projections.

"The market is not pricing in really outlier types of scenarios here," Gilbert told CNBC's "Trading Nation" on Friday. "Call it a 25 basis point, no significant changes, the broader S&P market might be up 20 to 40 basis points."

The chances of a 25-basis-point hike from the Federal Open Market Committee at the March meeting sit at 94 percent, according to CME Group fed funds futures. A rate increase of that size would put the federal funds rate at 1.5 percent to 1.75 percent. Markets are pricing in a zero chance of a hike any larger than 25 basis points.

"If we get an outlier event like a 50-basis-point rate hike, seeing the S&P 500 down 3 percent is certainly not the craziest statement I'm ever going to make," said Gilbert.

The Fed's dot plot chart should also give markets crucial details about how many rate hikes to expect over the next several years. The graphic demonstrates individual policymakers' longer-run forecasts for the federal funds rate.

If the dot plot projections conflict with market expectations for how many rate increases occur this year, it could also cause moves in equities and the bond market. Markets are pricing in three rate hikes this year — one each in March, June and September — with the fed funds rate ending 2018 at 2 percent to 2.25 percent.

Fed Chair Jerome Powell should provide color on the central bank's decision and forecasts at a news conference Wednesday afternoon. This marks the first Fed meeting helmed by Powell, who succeeded former Chair Janet Yellen in February. The committee will not meet again until early May.

Bond markets will be on watch when the Fed makes its move Wednesday afternoon. Activity in the yield curve, which charts yields on different maturities, is of particular interest to Gina Sanchez, CEO of Chantico Global.

"What's really interesting right now is you have the short end of the [yield] curve going up, partially because you have more supply and you have less demand," Sanchez told "Trading Nation" on Friday. "However, the news out of Washington has been pushing the long end of the curve down."

Yields on short-term bonds have increased largely due to corporate repatriation, says Sanchez. Companies have brought back larger amounts of cash previously held overseas since congressional Republicans passed favorable tax changes in December. Longer-term bonds such as the 10-year and 30-year have held in a close range in the past month.

The U.S. 2-year yield hit a high of 2.32 percent on Monday, its highest point since September 2008, while the 10-year traded at 2.87 percent.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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