Behind the AI doomsday theory, the institution strikes again: the Federal Reserve will “turn a blind eye” to oil price shocks, with an interest rate cut within a year — All in.

Ask AI · Why does Citrini firmly believe the Federal Reserve will ignore the oil price shock?

While geopolitical developments in the Middle East briefly caused the market to abandon expectations for the Fed to cut rates this year, the well-known research firm Citrini Research says this view is fundamentally wrong—and it has already built an all-in position to bet on it.

As the Iran conflict drives a surge in oil prices and broader commodity prices, market expectations for the Fed’s interest-rate direction this year have flipped dramatically. In a recent Substack post, Citrini Research founder James van Geelen stated unequivocally: the Federal Reserve will “ignore” the oil price shock and start cutting rates within the next year, and the market’s current repricing is a concentrated manifestation of a “recency bias.”

Based on the above view, Citrini has put together an all-in portfolio strategy—going long three-month secured overnight financing rate (SOFR) futures (SR3CH27) due March 2027, paired with stock short hedging. The firm said this position was built gradually over Monday and Tuesday.

Market expectations swing sharply: from rate cuts to the risk of hikes

Before the outbreak of the conflict, according to the CME FedWatch tool, the market expected the Fed to cut rates at least twice this year, with nearly a 40% chance of betting on more aggressive easing. But as oil prices have risen, that expectation has completely reversed—the market now expects rates to stay unchanged this year and assigns a 17% probability to a rate hike.

SOFR futures are a core tool for tracking the path of short-term rates, representing the benchmark rate used by major banks and financial institutions for overnight lending. A decline in the futures prices directly reflects that concerns about short-term rate increases are rapidly heating up.

Citrini: This is recency bias, not rational pricing

Van Geelen argues that the market is mixing the current situation with the 2022 oil price shock, making the classic mistake of a recency bias error.

He points out that the backdrop in 2022 was that interest rates were at the zero lower bound and CPI was above 5%, leaving the Fed with no choice but to hike aggressively. “The world we’re in now is completely different—rates are already close to neutral.”

He further explains: If oil prices remain elevated, simply maintaining the current interest-rate level is already sufficiently restrictive on its own. Rising oil prices will gradually transmit to the real economy, leading to economic slowdown; at that point, the Fed will actually have room to cut rates in line with the trend. In addition, he emphasizes that rate hikes cannot create more oil supply, and amid a backdrop of unemployment continuing to rise, the Fed is even less likely to choose tightening. “Whether it’s Warsh or Powell, they will choose to ignore this shock—that is fundamentally not the same as the inflation that was triggered by being forced to start from zero interest rates to fight fiscal stimulus back then.”

Two-scenario bet: whether the war ends or continues, the strategy holds logic

Van Geelen designed a logical closed loop for the strategy under two scenarios. If the Iran conflict is resolved within one month as the stock market expects, consumers will still feel pressure from the previously high oil prices, and short-term rates will likely return to pre-conflict levels, allowing SOFR longs to benefit. If the war lasts, the stock market will fall further, and the stock short positions will provide hedging protection.

He also notes that, given that any war-related comments by Trump on social media could quickly trigger a sharp rebound, stock shorts need to be managed carefully. He set a clear stop-loss line: if the S&P 500 index (SPX) touches 6750, he will exit the stock short position.

Deep U.S. stock-market exposure is the final constraint

Van Geelen offers a more macro-level rationale: Americans’ deep participation in the stock market creates an implicit constraint on the Federal Reserve’s policy path. He believes that once the market drawdown is large enough, the market’s own pressure will make the expectation that the Fed will not cut rates over the next 12 months unsustainable—ultimately forcing rate-cut expectations to revert.

It is also worth noting that Citrini previously released an AI “doomsday report” in February this year that drew widespread attention, causing software stocks to drop collectively and giving it substantial 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.