AI Doomsday Institution Strikes Again: Fed to "Ignore" Oil Shock, All-In on Interest Rate Cuts Within a Year

The market once abandoned expectations for a Fed Rate Cut this year due to the Middle East situation, but renowned research firm Citrini Research believes this judgment is fundamentally wrong and has established a full-position bet.

As the Iran conflict triggers a surge in oil and commodity prices, market expectations for the Federal Reserve's interest rate path this year have undergone a sharp reversal. Citrini Research founder James van Geelen explicitly stated in his latest Substack post: **The Fed will "ignore" the oil price shock and initiate interest rate cuts within the coming year; the market's current repricing is a concentrated manifestation of "recency bias."

Based on this judgment, Citrini has established a full-position portfolio strategy—going long on three-month Secured Overnight Financing Rate (SOFR) futures maturing in March 2027 (SR3CH27), while hedging with equity shorts. The firm stated that this position was gradually established on Monday and Tuesday.

Market Expectations Shift: From Interest Rate Cuts to Rate Hike Risks

Before the conflict broke out, the CME FedWatch tool showed that the market expected the Fed to implement at least two interest rate cuts this year, with nearly a 40% probability betting on even more substantial easing. With the rise in oil prices, this expectation has completely reversed—the market now expects rates to remain unchanged this year, with a 17% probability betting on a rate hike.

SOFR futures are a core tool for tracking the direction of short-term interest rates, representing the benchmark rate used by major banks and financial institutions for overnight lending. The decline in related futures prices directly reflects the rapidly rising market concern over an upward trend in short-term interest 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 classic recency bias error.

He pointed out, "The backdrop in 2022 was a zero lower bound on rates and CPI exceeding 5%, leaving the Fed with no choice but to hike rates aggressively. The world we live in now is completely different; rates are already near neutral."

He further elaborated: "If oil prices remain high, simply maintaining current interest rate levels is already sufficiently restrictive. The rise in oil prices will gradually transmit to the real economy, causing an economic slowdown, which will instead give the Fed room to implement an interest rate cut." Furthermore, he emphasized that rate hikes cannot create more oil supply, and against the backdrop of a continuous rise in the unemployment rate, the Fed is even less likely to choose to tighten policy. "Whether it's Warsh or Powell, both would choose to ignore this shock—this is fundamentally not the same thing as being forced to combat inflation triggered by fiscal stimulus starting from zero interest rates."

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

Van Geelen designed a logical closed loop for this portfolio strategy under two scenarios. If the Iran conflict is resolved within a month as the stock market expects, consumers will still be pressured by the previous high oil prices, short-term rates will likely revert to pre-conflict levels, and the SOFR long position will benefit. If the war continues, the stock market will fall further, and the equity short positions will provide hedging protection.

He also noted that equity shorts need to be managed cautiously, given that any war-related statement by Trump on social media could quickly trigger a sharp rebound. He has set a clear stop-loss: if the S&P 500 Index (SPX) reaches 6750 points, he will exit the equity short position.

Deep US Equity Holdings Are the Ultimate Constraint

Van Geelen presented a broader logical support: the deep involvement of the American public in the stock market constitutes an implicit constraint on the Fed's policy path. He believes that once the market falls sufficiently, the market pressure itself will make the expectation of "no Fed Rate Cut in the next 12 months" unsustainable, ultimately forcing a return of rate cut expectations.

Notably, Citrini previously released an AI "doomsday report" in February this year that garnered widespread attention and caused a collective plunge in software stocks, allowing the firm to accumulate considerable influence in the market. This bet on the Fed's path is the firm's latest major judgment at the intersection of geopolitics and monetary policy.