Institutions behind the AI doomsday theory take action again: The Federal Reserve will "turn a blind eye" to the impact of oil prices, betting on rate cuts within a year.

The market temporarily abandoned expectations for Fed rate cuts this year due to the situation in the Middle East, but the renowned research institution Citrini Research believes this judgement is fundamentally mistaken and has established a full-position bet.

With the Iran conflict causing a surge in oil and commodity prices, market expectations for the Fed’s rate trajectory this year have seen a dramatic reversal. Citrini Research founder James van Geelen made it clear in his latest Substack post: The Fed will “ignore” the oil price shock and initiate rate cuts within the next year. The market’s current repricing is a concentrated manifestation of ‘recency bias’.

Based on this judgement, Citrini has established a full-position portfolio strategy—longing the three-month secured overnight financing rate (SOFR) futures (SR3CH27) maturing in March 2027, while also employing a short stock hedge. The institution stated that this position was gradually built up on Monday and Tuesday.

Market Expectation Shift: From Rate Cuts to Rate Hike Risk

Before the conflict erupted, according to the CME FedWatch tool, the market anticipated at least two rate cuts by the Fed this year, and there was nearly a 40% chance of betting on even greater easing. However, with rising oil prices, this expectation has completely reversed—the market now expects rates to remain unchanged this year, and there is a 17% chance of a rate hike.

SOFR futures are a core tool for tracking short-term interest rate trends, representing the benchmark rate major banks and financial institutions use for overnight borrowing. The decline in related futures prices directly reflects growing market concerns about rising short-term rates.

Citrini: This Is Recency Bias, Not Rational Pricing

Van Geelen believes the market is conflating the current situation with the 2022 oil price shock, committing a typical recency bias error.

He pointed out, in 2022, rates were at the zero lower bound and CPI exceeded 5%. The Fed had no choice but to hike rates aggressively. “The world we are in now is completely different; rates are near the neutral level.”

He further explained: If oil prices remain high, simply keeping rates at the current level is restrictive enough. Rising oil prices will gradually transmit to the real economy, causing a slowdown, which in turn gives the Fed room to cut rates. Moreover, he emphasized, rate hikes cannot create more oil supply, and with rising unemployment, the Fed is even less likely to tighten policy. “Whether it’s Warsh or Powell, they will choose to ignore this shock—this is fundamentally different from the situation where they were forced to counter inflation with fiscal stimulus starting from zero rates.”

Dual Scenario Bets: Whether the War Ends or Continues, the Strategy Holds Logic

Van Geelen designed two logical frameworks for this portfolio strategy. If the Iran conflict is resolved within a month as the stock market expects, consumers will still be under pressure from high oil prices, and short-term rates are very likely to return to pre-conflict levels, benefiting SOFR longs. If the war drags on, the stock market will fall further, and stock shorts will provide hedge protection.

He also pointed out that given any war-related statements by Trump on social media could rapidly trigger a major rebound, the stock short position should be managed cautiously. He set a clear stop-loss threshold: if the S&P 500 index (SPX) reaches 6750 points, he will exit the stock short position.

Deep U.S. Stock Holdings Are the Final Constraint

Van Geelen presented a more macro logical support: the deep involvement of Americans in the stock market forms an implicit constraint on the Fed's policy path. He believes that once the market falls enough, the market pressure itself will make the expectation of “no Fed rate cuts in the next 12 months” unsustainable, ultimately forcing rate cut expectations to return.

It is worth noting that Citrini previously issued a widely followed AI “doomsday report” in February this year, causing a collective drop in software stocks and earning considerable influence in the market. This latest bet on the Fed’s path is the institution’s newest major judgement at the intersection of geopolitics and monetary policy.

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