Institutions Behind the AI Doomsday Theory Act Again: Fed to "Turn a Blind Eye" to Oil Price Shocks, All in on Rate Cuts Within a Year
The market temporarily abandoned expectations of a Fed rate cut this year due to Middle East tensions, but the well-known research firm Citrini Research believes this judgment is fundamentally flawed and has established a full-position bet accordingly.
As the Iran conflict sent oil and commodity prices soaring, market expectations for the Fed’s rate direction this year underwent a sharp 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 embodiment of "recency bias."
Based on this outlook, Citrini has established a full-position portfolio strategy—going long March 2027 three-month secured overnight financing rate (SOFR) futures (SR3CH27), while hedging with equity short positions. The firm stated that this position was gradually established on Monday and Tuesday.
Market Expectations Shift Sharply: From Cuts to Hike Risk
Before the conflict, according to the CME FedWatch tool, the market expected the Fed to cut rates at least twice this year, with almost a 40% probability betting on even more aggressive easing. But as oil prices surged, these expectations have completely reversed—the market now expects rates to hold steady this year, with a 17% probability of a rate hike.
SOFR futures are a core tool for tracking short-term interest rate trends, reflecting the benchmark rate used for overnight interbank lending among major banks and financial institutions. The decline in related futures prices directly signals rising market concerns about an increase in 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 mistake.
He noted, “In 2022, rates were at the zero lower bound and CPI was over 5%, leaving the Fed with no choice but to hike sharply. The world we’re in now is completely different—interest rates are close to neutral.”
He further explained: If oil prices remain high, simply keeping rates at current levels is already restrictive enough; higher oil prices will gradually filter into the real economy, leading to an economic slowdown and thus giving the Fed scope to cut rates. Additionally, he emphasized that hiking rates doesn’t create more oil supply, and with unemployment continuously rising, the Fed is even less likely to tighten policy. "Whether it’s Warsh or Powell, they will choose to ignore this shock—it’s fundamentally different from being forced to fight inflation triggered by fiscal stimulus from a zero interest rate base."
Dual-Scenario Bet: Strategy Holds Under Both War-Ending or Ongoing Scenarios
Van Geelen designed a closed-loop logic for this portfolio strategy under two scenarios. If the Iran conflict is resolved within a month as the equity market expects, consumers will still be pressured by the surge in oil prices, making it highly likely that short-term rates return to pre-conflict levels, which would benefit SOFR long positions. If war continues, equities will fall further, and the equity short positions will provide hedging protection.
He also pointed out that, given any war-related statements by Trump on social media could rapidly trigger a sharp rebound, equity shorts must be carefully managed. He set a clear stop-loss: if the S&P 500 Index (SPX) reaches 6,750, he will exit equity shorts.
Deep Equity Market Exposure is the Final Constraint
Van Geelen put forth a more macro-level logic: American households’ deep participation in the stock market constitutes an implicit constraint on the Fed’s policy path. He believes that once markets fall sharply enough, market pressure itself will make the "no Fed cuts in the next 12 months" expectation unsustainable, ultimately forcing rate cut expectations to return.
Notably, Citrini previously released a widely-followed AI "doomsday report" in February this year, triggering a sharp drop in software stocks and significantly raising its profile in the market. This bet on the Fed path is the firm’s latest major judgment at the intersection of geopolitics and monetary policy.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
You may also like
U.S. stocks opened higher and fluctuated, the Japanese yen rebounded more than 1% intraday, 10-year U.S. Treasury yields broke above 5.22% again, and U.S. crude oil once fell nearly 3%.
After the release of U.S. consumer confidence data, the S&P and Nasdaq turned negative, while the Dow is poised to break a three-day losing streak but is set for a fourth consecutive weekly decline. Meta pulled back, falling more than 3% during the session. The U.S. 10-year Treasury yield surpassed 5.22% again, marking a new high for the third day in a row since 2007, while the 30-year yield reached its highest level since 2004. The yen/dollar pair surged 1.2% intraday, as Japanese and U.S. officials successively signaled concerns over the weak yen. Expectations for a diplomatic resolution between the U.S. and Iran are rising, halting crude oil's two-day climb.
US Treasury volatility surges, triggering alarms! BofA’s Hartnett warns of rising deleveraging risks as higher yields become main threat to the market
Bank of America strategist Michael Hartnett warns that the recent sharp rise in volatility in the US bond market is increasing the risk of broader deleveraging in financial markets.
U.S. diesel prices surge 83% this year! Apollo Chief Economist warns: Cost pass-through may make core inflation more stubborn, Federal Reserve can't ignore it
Torsten Slok, Chief Economist at Apollo Global Management, has warned that the inflation threat posed by the surge in U.S. diesel prices to historic highs may be more serious than the Federal Reserve currently realizes.
Crypto prices
More
