IF THE Federal Reserve does increase interest rates on December 16th, very few investors will be taken by surprise. It will be the most discussed, most anticipated rate rise in history.

Typically, markets buy on the rumour and sell on the news. So although higher interest rates might be expected to boost the dollar, and be bad for both equities and Treasury bonds, the market may have fully anticipated the impact. The dollar has already risen by 10% against the euro this year.

History suggests that the first rate increase is not a huge market-mover. BCA Research has looked at 17 rate-tightening cycles since 1971. In the three months after the Fed raised rates for the first time, the stockmarket fell on ten occasions, rose on six and was flat in the other instance. Thanks to a couple of very strong rallies during the mid-1980s and mid-1990s, the average movement was a 1.1% gain. On average, the Treasury-bond market marginally underperformed equities in the three months after a first rate hike.

But as Citigroup points out, the Fed is starting to tighten at an unusual time. Normally, the move is made to head off inflationary pressures, but commodity prices are falling at the moment, not rising. In part, this may be down to oversupply in some commodities (like oil), but weak demand is also playing a role.

Furthermore, tighter policy usually comes when investors’ appetite for risk is reviving. But credit spreads (the difference between the interest rates on bonds issued by companies and those paid by governments) are rising, not falling—a sign of caution. By the same token, the first Fed increase usually occurs as the economy is rebounding and when corporate profits are rising; this recovery has been going on for so long that profits have already started to falter.

The profits of S&P 500 companies in the third quarter were 1.2% lower than in the same period in 2014.

In other words, the Fed usually increases rates when the economy is steaming ahead and investors can ignore the adverse impact of monetary policy in favour of the good news. This time is genuinely different. Global equities have been flat since the start of 2014 (in dollar terms) and Treasury-bond yields have fallen slightly over the same period (see chart).

A related issue is the huge reliance of markets on central-bank support since the crisis broke in 2007. This was neatly illustrated on December 3rd when the European Central Bank failed to cut rates by as much as expected; disappointed equity markets fell sharply.

A low-rate policy has encouraged investors to buy risky assets like corporate bonds and equities instead of holding cash. Economic fundamentals have been almost irrelevant to the market mood.

When the economy has looked strong, that has been good news for equities and corporate bonds because profits are boosted. But a weak economy has also been good news, since central banks have been driven to offer more stimulus.

Sentiment is bound to change once the Fed starts to tighten. Good news on the economy might not be positive for markets, since it could signal further rate rises. The first rate increase may be baked into asset prices; what matters from here is the pace of further tightening. Futures prices imply only two further quarter-point hikes in 2016. When the Fed raised rates more quickly than the markets expected in 1994, it instigated a rout in government bonds.

The impact on markets makes it all the more likely that the Fed will proceed cautiously. The best analogy is with a parent teaching a child to ride a bicycle: the prudent approach is to stand close enough to catch the falling tot, and only remove the training wheels later on.

A sharp rise in bond yields and spreads during 2016 would have a dampening effect on economic activity. A sharp fall in equities would weaken consumer confidence. In the past the Fed has reacted to such developments by cutting rates, not increasing them.

The worst news for the markets would be if the Fed has miscalculated in either direction.

Perhaps it has been too slow to tighten and inflation is about to take off. If that is the case, then Treasury-bond yields will rise sharply, probably hurting corporate bonds and equities.

The more plausible risk is that America’s central bankers are acting too soon and the signs of a slowdown in the global economy may show up on their doorstep next year. If that proves to be the case, equities will suffer but Treasury bonds will do fine. Investors have to hope that the Fed has judged things exactly right.