Market expectations for Federal Reserve rate cuts this year were briefly abandoned due to Middle East tensions, but prominent research firm Citrini Research believes this assessment is fundamentally flawed and has established a full position based on its view.

As conflict involving Iran triggered a surge in oil and broader commodity prices, market expectations for the Fed's interest rate path this year shifted dramatically. Citrini Research founder James van Geelen stated clearly in his latest Substack post that the Fed will "look through" the oil price shock and initiate rate cuts within the next year, arguing that the current market repricing is a concentrated example of "recency bias."

Based on this outlook, Citrini has implemented a full portfolio strategy—going long on three-month Secured Overnight Financing Rate (SOFR) futures expiring in March 2027 (SR3CH27), while hedging with equity short positions. The firm indicated that this position was gradually established throughout Monday and Tuesday.

**Rapid Shift in Expectations: From Rate Cuts to Hike Risks**

Prior to the conflict, according to the CME FedWatch Tool, the market anticipated at least two Fed rate cuts this year, with nearly a 40% probability priced in for even more substantial easing. Following the oil price spike, this expectation has completely reversed—markets now project no change in rates this year, with a 17% chance of a rate hike.

SOFR futures are a key instrument tracking short-term interest rate expectations, representing the benchmark rate used for overnight borrowing among major banks and financial institutions. The decline in these futures prices directly reflects rapidly growing market concern about rising short-term rates.

**Citrini: This is Recency Bias, Not Rational Pricing**

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

He points out that the context in 2022 was characterized by interest rates at the zero lower bound and CPI exceeding 5%, leaving the Fed with no choice but to hike aggressively. "We are in a completely different world now, with interest rates near neutral levels."

He further elaborates: if oil prices remain elevated, merely maintaining the current level of interest rates is sufficiently restrictive on its own. High oil prices will gradually transmit through to the real economy, causing an economic slowdown, which would subsequently give the Fed room to cut rates. Additionally, he emphasizes that raising rates cannot create more oil supply, and against a backdrop of rising unemployment, the Fed is even less likely to choose policy tightening. "Whether it's Warsh or Powell, they would choose to look through this shock—it's entirely different from being forced to fight inflation driven by fiscal stimulus starting from zero interest rates."

**A Two-Scenario Bet: Strategy Logic for War Resolution or Escalation**

Van Geelen has designed a logical framework for this portfolio strategy under two potential scenarios. If the Iran conflict is resolved within a month, as the equity market seems to expect, consumers will still feel the pressure from prior high oil prices, short-term rates will likely revert to pre-conflict levels, and the long SOFR position will profit. If the war persists, equities are likely to fall further, and the equity short positions will provide hedging protection.

He also notes that given any war-related statements from Donald Trump on social media could trigger sharp market rebounds, the equity short positions require careful management. He has set a clear stop-loss level: if the S&P 500 Index (SPX) reaches 6750 points, the equity short positions will be exited.

**Deep Equity Ownership as the Ultimate Constraint**

Van Geelen presents a broader macro argument: the deep involvement of the American public in the stock market creates an implicit constraint on the Fed's policy path. He believes that once any market decline becomes sufficiently large, market pressure itself will make the expectation of "no Fed rate cuts over the next 12 months" untenable, ultimately forcing the return of rate cut expectations.

It is noteworthy that Citrini previously gained significant market influence after publishing a widely discussed AI "doomsday" report in February, which triggered a broad sell-off in software stocks. This latest bet on the Fed's path represents the firm's newest major call at the intersection of geopolitics and monetary policy.