On March 20, 2026, East Eight Time, Federal Reserve Governor Waller once again gave a clear and restrained signal: maintaining interest rates unchanged, emphasizing that a decision on whether to lower interest rates will be made after more economic data is available. He firmly anchored the decision on the subsequent performance of inflation and employment, while also highlighting high oil prices and geopolitical risks, reminding the market not to rush into betting on easing. Currently, oil shocks and potential risks in the Strait of Hormuz provide upward flexibility for inflation expectations, while on the growth side, there are concerns about possible weakening employment. The market is stuck between "inflation defense" and "growth floor": the Federal Reserve is unwilling to restart rate hikes, but also does not dare to easily press the interest rate cut trigger.

High Oil Prices and Strait Risks Approaching the Decision Red Line

In his latest statement, Waller bluntly stated that if oil prices remain high in the coming months, it will not be a "temporary shock," but will substantially push up core inflation. He specifically delineated a warning line with the phrase, "a high and persistent oil shock does not have a temporary impact on inflation," which is equivalent to telling the market: once energy prices stabilize at high levels, the inflation battle is far from over. This emphasis on the persistence of oil prices reflects a repeated recollection of the last round of inflation—the Federal Reserve prefers to "watch longer" rather than passively chase rate hikes.

Beyond the oil price narrative, the potential risks in the Strait of Hormuz have been brought into the discussion framework of monetary policy. If this critical waterway is interrupted or nearly closed, the global energy supply chain will instantly be strangled, resulting in a spike in oil prices that is almost predictable. Waller incorporated this scenario into the inflation discussion, indicating that geopolitical shocks are no longer just issues of national defense and diplomacy, but have directly entered the models for inflation and interest rate decisions. For a central bank that has not fully detached from the last round of inflation, every tension in the Strait of Hormuz brings it closer to its decision red line.

In this context of magnified geopolitical uncertainty, the Federal Reserve's defensive attitude toward "inflation rising again" has become particularly strong. The policy level is more willing to tolerate slightly elevated real interest rates for a period of time, rather than rashly initiating an easing cycle while geopolitical sparks are still present. In other words, as long as there are no clear signals of easing regarding oil prices and Strait risks, the tail risks of inflation reigniting will continue to weigh on decision-makers, which is why even as growth pressures gradually emerge, the Federal Reserve still prefers to take a wait-and-see approach.

A Policy Gap of Not Urgently Raising or Daring to Cut Rates

Waller painted a picture of the current policy gap with two seemingly opposing statements. One is "there is currently no need to consider raising interest rates," while the other is "if employment is weak, I will advocate for rate cuts again later this year." The former signals to the market that the rate hike cycle has already come to an end at the current benchmark, barring extreme surprises; the latter clearly ties the conditions for rate cuts to "significantly weakening employment," rather than a simple timetable or market expectations. This "two-end condition" setting compresses policy space into a narrow corridor: neither expanding upwards nor opening downwards for the time being.

Choosing to maintain interest rates unchanged reflects the Federal Reserve's subjective judgment of the current balance between inflation and employment: inflation is still some distance from the 2% target but is no longer out of control, and while there are signs of a cooling job market, it cannot yet be described as "weak." Under this framework, hasty rate hikes could weigh down what is already slowing growth, while premature rate cuts could be met with inflation data "refuting" them. Thus, the safest approach is to keep the policy rate in place, using time to gather information, and waiting for the data to provide clearer direction.

The problem lies in the market not being able to stand still within this "ambiguous zone." Each unexpected fluctuation in inflation or employment data triggers repeated repricing of the timing and magnitude of rate cuts: one path bets on faster employment decline, forcing the Federal Reserve to release multiple rate cuts within the year; the other believes inflation is stickier, delaying or even retracting easing. Interest rate swaps, government bond yield curves, and equity valuation models are all continuously redrawn in this gap, and the volatility of financial assets partly stems from this tension between "policy inaction and drastic changes in expectations."

The Awkward Pull of the Data-Dependence Framework in Reality

In recent years, the Federal Reserve has consistently emphasized that it is a "data-dependent" central bank, meaning it does not preset a path but adjusts policy based on the latest data on inflation and employment. However, in practice, the frequently released price and labor data often give conflicting directions: one month inflation slightly exceeds expectations, while the next month employment unexpectedly cools. This high-frequency volatility easily creates noise in the market. Decision-makers cannot overly react to single-month data, yet cannot ignore trend signals; the intuitive logic of "do what you see" becomes especially twisted in complex realities.

The briefing mentioned that a single source believes structural inflation may have approached 2%, providing a sample for the market to interpret as "the trend of the inflation battle has been settled." However, officials remain cautious in their statements and do not agree with this optimistic judgment. The central bank internally prefers to observe data over a longer time frame, fearing short-term downturns may obscure the reupward risk of energy, housing, or service prices. In other words, conclusions like "structural inflation near 2%" are still insufficient for officials to make a clear policy turnaround commitment.

Faced with the dual impact of data noise and transmission lags, the Federal Reserve confronts two opposing risks: policy lagging behind the situation and policy overreacting. If it insists on waiting for more confirming signals, it may begin rate cuts only when growth has rapidly slowed, incurring excessive unemployment costs; conversely, if it loosens its stance based on short-term data, it may be forced to urgently reverse course due to oil price or geopolitical surprises. Data dependence is meant to enhance decision-making flexibility, but in the current environment where inflation has not fully returned and growth is marginally slowing, it feels more like a difficult balancing act.

The Linked Chain from Wall Street to Asian Currency Markets

The Federal Reserve's inaction has first provided feedback on exchange rates and regional sentiment. On March 20, East Eight Time, USDCNH quoted 6.89562, a 24-hour increase of 0.27%, with the renminbi weakening slightly during the day, reflecting the market's repricing of sustained high-dollar rates. For Asian investors, this number is not just an exchange rate point, but also a signal that "the Federal Reserve will not swiftly turn to significant easing," thus favoring a return of funds to USD assets over local assets.

As the market accepts the setting of "high rates maintaining for longer," interest rate differential expectations become a key variable for the flow of funds between Wall Street and Asian markets. Maintaining high rates in the US supports the returns on dollar assets, creating a natural attraction for cross-border funds; meanwhile, some Asian economies tend to ease monetary policy earlier or more gently under growth pressure, compressing the domestic yield range. As a result, global allocation of funds is constantly reweighted among US stocks, US bonds, and Asian stocks and bonds based on the Federal Reserve's cues and local macro conditions, with every slight fluctuation in the Asian currency market implying underlying rebalancing actions of large funds.

On the equity market level, UBS predicts that the S&P 500 index is expected to reach 7,300 points in mid-2026, primarily due to profit growth and AI-driven factors. This optimistic expectation aligns with the current combination of "moderate inflation + no rush to cut rates," forming a certain tacit understanding: inflation is kept within a manageable range, rates, while high, are no longer rising, and the Federal Reserve is not in a hurry to cut rates, providing a sustainable valuation platform for corporate earnings and tech narratives. For risk assets, this represents an intermediate state of "tight enough to defend against inflation, yet not so tight as to stifle growth," which is precisely the story Wall Street is most eager to embrace.

New Stories of Crypto Assets Under Warming Risk Appetite

As the market gradually accepts the notion of rates being "high but predictable," with macro changes no longer occurring daily, high-risk assets have instead found new valuation imaginative space. The stability of macro interest rate expectations means a narrowing of discount rate fluctuations, allowing long-duration assets like tech stocks, growth stocks, and crypto assets to reconstruct their risk premiums within a relatively certain interest rate framework. At this point, incremental trading no longer stems from fantasies of extreme easing, but from repricing due to "compressed risk premiums" and "future cash flow growth."

Data from the on-chain side is similarly narrating a story of warming risk appetite. The Spark protocol achieved total revenue of $33 million in Q1 2026, a year-on-year growth rate of 10%, demonstrating that in the context of high interest rates, funds are still seeking sustainably profitable products on-chain; correspondingly, Michael Saylor revealed that the target annualized yield for the STRC product reaches 11.5%, providing a "higher yield" example for high-net-worth individuals and institutional funds. Whether through steady increases in protocol revenue or the design of high-yield products, they all point to the same path: when macro interest rates are relatively stable, funds begin to actively sink into on-chain and structured products in pursuit of excess returns.

If over the next few months, employment data starts to show more evident weakness, thus triggering the Federal Reserve to initiate a rate-cutting trend within the year, then this current gentle recovery of risk assets could evolve into a new round of liquidity repricing. Once rate cut expectations are confirmed, the discount rates for tech stocks and crypto assets will be further reduced, while the market will reassess the valuation ceilings for growth and innovation sectors. For on-chain protocols and tokens, this means not only looser funding conditions but also fiercer competition: whoever can find a balance among real returns, product safety, and narrative extendibility will have a better chance of amplifying their market cap in the next liquidity cycle.

The Federal Reserve's Next Step Between Inflation and Employment

In summary, the current situation of the Federal Reserve can be described as: neither raising rates nor rushing to cut them. On one hand, Waller has clearly temporarily removed the rate hike option from the table; on the other hand, he strictly binds the premise for rate cuts to "significantly weak employment." What truly amplifies decision uncertainty is not the data itself at present, but the oil prices and geopolitical variables—the persistence of oil shocks and the risks in the Strait of Hormuz contribute additional uncertainty to future inflation paths, thus becoming the hardest parts to price in policy.

In the coming months, two key observation points will dictate the direction of policy narratives: first, whether employment shows clearer and sustained signs of weakening, including slower non-farm payroll growth, rising unemployment rates, and changes in labor force participation; second, whether oil prices continue to stabilize at high levels or even further increase, along with whether geopolitical tensions surrounding energy supply chains ease. If employment weakens while oil prices fall, the Federal Reserve will find it easier to initiate the wheel-like rate cuts without sacrificing the inflation target; conversely, if employment remains stable while oil prices rise again, policy will be forced to skew more toward a hawkish side.

For market participants, in such a period of policy ambiguity, a more realistic approach is not to bet on the precise timing of rate cuts, but to focus on the relative change in risk premiums among different assets. US Treasury bonds, the US dollar, US and Asian equities, as well as high-risk assets including crypto assets, all react to the same macro expectations at different speeds and elasticity, and the real opportunities often lie within these discrepancies. The shadow of inflation still looms, but the Federal Reserve's "inaction" has quietly rewritten a new asset pricing framework on the levels of prices and sentiments.

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