The institution behind the AI doomsday theory strikes again: the Federal Reserve will "turn a blind eye" to the impact of oil prices, with rate cuts within one year.

The market temporarily abandoned the Fed’s rate cut expectations for the year due to Middle East tensions, but renowned research firm Citrini Research believes this judgment is fundamentally flawed and has established a full-position bet.

As the Iran conflict triggered soaring oil and commodity prices, market expectations for the Fed’s interest rate trajectory this year have sharply reversed. James van Geelen, founder of Citrini Research, clearly stated in his latest Substack post: The Fed will “ignore” the oil shock and start cutting rates within the next year. The current market re-pricing is a manifestation of a “proximate cause bias.”

Based on this judgment, Citrini has built a full-position strategy—long positions in March 2027 SOFR futures (SR3CH27), with stock short hedges. The firm states that this position was gradually established on Monday and Tuesday.

Market expectations shift dramatically: from rate cuts to rate hike risks

Before the conflict erupted, according to CME FedWatch, the market expected at least two rate cuts this year, with nearly a 40% chance of betting on larger easing. However, with oil prices rising, this expectation has been completely reversed—currently, the market expects rates to remain unchanged this year, with a 17% chance of rate hikes.

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

Citrini: This is a proximate cause bias, not rational pricing

Van Geelen believes the market is conflating the current situation with the 2022 oil shock, committing a classic proximate cause bias error.

He points out that the 2022 context was one of zero lower bound rates, CPI over 5%, and the Fed had no choice but to sharply hike. “The world we are in now is completely different; rates are near neutral.”

He further explains: If oil prices remain high, maintaining current rates alone is already sufficiently restrictive. Rising oil prices will gradually transmit to the real economy, causing a slowdown, at which point the Fed would have room to cut rates. Additionally, he emphasizes that rate hikes cannot increase oil supply, and with unemployment rising, the Fed is even less likely to tighten policy. “Whether it’s Warsh or Powell, they will choose to ignore this shock—this is not the same as the forced zero-rate response to fiscal stimulus-driven inflation back then.”

Dual scenario bets: end of war or continuation, both have logic

Van Geelen designed a logical loop for this position under two scenarios. If the Iran conflict is resolved within a month as stock markets expect, consumers will still be under pressure from previous high oil prices, and short-term rates are likely to revert to pre-conflict levels, benefiting SOFR longs. If the war continues, stock markets will further decline, and stock shorts will provide hedging protection.

He also notes that any war-related statements by Trump on social media could trigger rapid rebounds, so stock shorts should be managed cautiously. He set a clear stop-loss: if the S&P 500 (SPX) hits 6,750 points, he will exit the stock short position.

Deep US equity holdings as the ultimate constraint

Van Geelen offers a broader macro rationale: the deep participation of the American public in the stock market forms an implicit constraint on Fed policy paths. He believes that once the market declines enough, the pressure itself will make the “Fed not cutting rates in the next 12 months” expectation unsustainable, ultimately forcing a rate cut expectation to re-emerge.

It is noteworthy that Citrini previously released a widely discussed AI “end-of-report” in February this year, which caused a collective plunge in software stocks, earning significant influence in the market. This bet on the Fed’s path is the firm’s latest major judgment at the intersection of geopolitical and monetary policy.

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