On March 30, 2026, Federal Reserve Governor Miran put forward a rare combination of policies in a public setting: on one hand, he clearly argued that the current Federal Reserve balance sheet is "too large," needing a quicker reduction through balance sheet contraction; on the other hand, he anticipated an accumulated rate cut of about 1 percentage point within the next year, predicting that inflation would drop back to near the 2% target in about a year. Against the backdrop of rising oil prices and renewed inflationary pressures, he still emphasized that "inflation expectations are not affected by oil prices," believing the expected anchoring remains solid, which is in stark contrast to market intuition. The real question to pursue is how this dual-track operation of "accelerated balance sheet reduction" and "moderate rate cuts" placed within the same timeframe, combined with the judgment that inflation expectations remain controllable, will reshape global liquidity and risk pricing, and how it will alter the trading environment for crypto assets and traditional high-beta assets.

Accelerating Balance Sheet Reduction: The Implicit Constraining Spell of the Balance Sheet

In this statement, Miran's first judgment was that the current Federal Reserve balance sheet is "too large" and needs more proactive balance sheet reduction to restore policy space. He did not provide specific numbers or a timeline, but the public data from multiple rounds of quantitative easing following the pandemic indicates that the Federal Reserve's balance sheet expanded significantly from its relatively "lean" state before the pandemic to several trillion dollars and maintained a high level for a long time. Miran's wording serves more as a directional correction of this balance sheet expansion legacy: after inflation gradually recedes and the crisis mode exits, the enormous balance sheet itself becomes a continuous easing stance that needs to be reversed.

The emergency bond purchases and large-scale asset purchases following the outbreak led to a rapid accumulation of treasury bonds and MBS held by the Federal Reserve, causing a steep rise in the total balance sheet. Now that inflationary pressures have eased relatively and the financial system has returned from extreme emergency to a relatively normal state, maintaining such a scale means that financial conditions are kept in a position that is more accommodative than "neutral" for a long time. Miran’s call for balance sheet reduction can be understood as a desire to gradually withdraw this portion of implicit liquidity "redemption vouchers" by reducing the stock of existing assets, reopening space for the next round of crises or recessions.

From a market mechanism perspective, faster balance sheet reduction often suppresses risk tolerance through three channels: first, a tightening of excess reserves and liquidity buffers in the banking system raises the "floor" on funding prices; second, by reducing long-term treasury holdings, the Fed applies upward pressure on long-term rates and increases the discount rate across all assets; third, when the whole risk-free yield curve shifts upward, high-volatility assets such as stocks, REITs, and crypto assets experience a discount on their present values of future cash flows or growth stories. This "invisible rate hike" effect can quietly tighten financial conditions even as nominal rates remain unchanged.

However, if balance sheet reduction is pushed too quickly, it may also amplify bond market volatility and overall risk aversion. A faster reduction translates to the primary and secondary markets needing to absorb a larger duration supply, increasing the probability of short-term yield spikes, leading to higher price volatility. Without specific cases and numeric supports, a principled assumption can be made: once the market harbors doubts about "who will take over," funds may temporarily withdraw from high-risk assets in favor of shorter-duration, higher-credit-quality instruments to address potential price swings. This change in expectations regarding long-term rates and volatility itself constitutes a sentiment suppression on risk assets.

A Rate Cut of 1 Percentage Point in One Year: The Coexistence of Hawks and Doves

Equally striking as the balance sheet reduction proposal is Miran's prediction of a "cumulative rate cut of about 1 percentage point within a year." He also judged that inflation would drop back to around the 2% target in about a year. This implies that in the scenario he envisions, the Federal Reserve is willing to gradually lower the policy rate to give moderate consideration to economic growth and financial conditions while executing balance sheet reduction and retracting liquidity.

More crucially, Miran explicitly stated he aims to "hedge the impact of balance sheet reduction through the pace of rate cuts." This statement outlines his policy logic more clearly: balance sheet reduction is directional, intending to repair the long-term balance sheet structure; while interest rates are treated as a more flexible tactical tool to offset the excessive tightening of financial conditions caused by balance sheet reduction. This idea of "division of labor between interest rates and balance sheets" is essentially an experiment in dual-track policy—not merely treating balance sheet reduction as a substitute or supplement for rate hikes, but attempting to establish it as an independent dimension that can run parallel to rate cuts.

From historical experience, in previous tightening cycles, interest rates and balance sheet reductions typically move in the same direction: first the rate hikes, then the balance sheet contraction, or rate hikes and balance sheet reduction occurring almost simultaneously, with the aim of strengthening tightening signals through multiple channels. Miran’s vision this time is clearly different in path: emphasizing a more resolute "decline" from the balance sheet end while being willing to enter an easing expectation earlier at the rate end, separating their use. This misalignment itself sends a new signal to the market—future observations of the Federal Reserve should no longer just focus on "whether or not to raise rates," but also evaluate how the pace of balance sheet reduction and the direction of interest rates are combined.

At the market pricing level, this combination could potentially create some balance regarding yield curves, funding costs, and asset valuations. Once the policy rate gradually declines, short-end yields are expected to fall first, while the pressure from tapering on the long end may partially offset the steepening of the yield curve, resulting in a relatively moderate decline in long-end rates. In this way, corporate and household financing costs could benefit from certain relief through short-end rates, while long-term discount rates would not plunge sharply, preventing the inflation of high-valuation asset bubbles. In this scenario of "gentle rebalancing," risk asset valuations do not undergo one-directional surges or crashes but are more likely to reprice around a new real rate core.

Amid Rising Oil Prices: Can Inflation Expectations Truly Stand Alone?

Equally sensitive as the paths of balance sheet reduction and rate cuts is Miran's attitude toward inflation expectations. He emphasized in his statement that "inflation expectations are not affected by oil prices," insisting that inflation will return to the 2% target in about a year. The key here is that what he values is "expectations" rather than immediate fluctuations in current prices. Even if oil prices rise temporarily, pushing up the energy components in short-term CPI or PCE, as long as businesses and households do not raise their medium- to long-term price expectations in sync, the central bank can view this as a one-time price shock rather than a self-reinforcing inflation cycle.

From a broader macro perspective, the factors behind the current rise in oil prices are complex and diverse, including macro supply and demand recovery, geopolitical disruptions, and supply-side constraints. However, from a monetary policy perspective, the central bank is more concerned with whether this round of rising oil prices is a temporary supply shock or will spread into sustained upward pressure on service prices and core inflation. Without introducing specific wage-price spirals or numerical chains of oil price shocks, it can be summarized into two bifurcated pathways—if it is just a one-time shock, the upward pressure on inflation will naturally fade after oil prices peak; if expectations are misaligned, with both businesses and workers anticipating prolonged high inflation, price and wage adjustments will self-reinforce.

Miran is clearly betting on the former scenario: as long as the anchoring of inflation expectations is successful, the Federal Reserve has greater policy space while executing the "balance sheet reduction + rate cuts" combination. Stabilized inflation expectations mean the central bank does not need to resort to more aggressive rate hikes to "combat expectations," thus allowing a relatively moderate rate reduction to hedge against the tightening impacts of balance sheet reduction on the financial environment. Within this framework, the balance sheet can steadily contract towards a healthier scale, while interest rates provide a certain bottom line for the economy to avert triggering new recessions or financial imbalances during the adjustment process.

However, this judgment carries significant controversy risks. There remains another voice in the market: if oil prices continue to rise or remain high for too long, even if current expectations have not obviously gone out of control, they may gradually erode the central bank's credibility. Whether inflation expectations have truly not been pried loose by oil prices, and whether the Federal Reserve has sufficient time and tools to re-anchor expectations should they begin to loosen, do not have ready answers. In a context of limited information and a prohibition on fabricating specific causal chains and data, a more realistic approach is to view it as a dynamic game: the market questions expectations through prices, while the central bank tries to stabilize the anchor through communication and operational pathways.

Artificial Intelligence and Employment Enter the Central Bank Agenda

Beyond traditional monetary policy topics, Miran also threw out a particularly unconventional statement: "Central banks should not obstruct artificial intelligence from creating jobs." It should be clear that this statement currently comes from a single source of information, but it still carries distinct symbolic significance—discussions about artificial intelligence and employment are being explicitly integrated into the public policy considerations of Federal Reserve officials, rather than remaining confined to internal discussions in academia or the tech industry.

For a long time, the central bank's main line of focus in policymaking has been the trade-off between inflation, employment, and financial stability, but the role of technological progress within this triangle has often been implicit: categorized as "productivity shocks" or "structural factors" in models but rarely appearing publicly in the form of a specific technology like AI. Miran’s comments pull AI directly into the central bank narrative, equating to an acknowledgment that technological paths will significantly alter the demand structure of the labor market, and policies should not easily align against innovation.

This also raises a new dimension for evaluation: how the central bank can assess the long-term impact of technological advances on employment while focusing on inflation and financial stability. If AI replaces labor and lowers costs at certain stages, it may temporarily reduce some price pressures, but it could also bring about new demand and jobs in other dimensions; this complex effect challenges the traditional simple logic of "tight employment = high inflation." If the central bank acts too heavily based on old models, it risks misjudging the real tensions in the labor market and the potential output paths.

For risk assets and technology sectors, the signals released by such statements are relatively clear: policy is not viewing AI as a risk source that needs to be actively suppressed, but rather leans towards allowing it to expand naturally without undermining financial stability. This is beneficial for supporting the long-term expectations of tech growth stocks and related sectors and provides a more accommodative narrative environment for areas such as crypto and Web3 that are highly coupled with AI. As long as regulation does not treat the "impact of AI on employment" as a risk that needs to be aggressively hedged with tightening policies, there will be motivation for funds to continue searching for long-term beta and structural premiums in this direction.

Dual Track Signal Transmission: Repricing on Wall Street and Crypto Markets

Connecting the three lines of balance sheet reduction, rate cuts, and inflation expectations, we can see that the market is currently faced with two distinctly different interpretive paths. One interpretation views Miran's statement as "tightening followed by easing"—balance sheet reduction tightening at the balance sheet end while releasing signals of future continued de-leveraging; rate cuts serve merely as mild buffers, coming to fruition only when the economy faces pressure. Another interpretation leans towards "gentle rebalancing"—balance sheet reduction and rate cuts are advancing simultaneously, and the combination aims to construct new neutral rates and balance sheet scales, slowly converging around a new equilibrium rather than experiencing a drastic tightening shock followed by a swift easing.

In the traditional asset space, bonds and stocks will price this dual track pathway in their own ways. Bond investors need to reassess the center of actual rates: balance sheet reduction amplifies duration supply and raises long-term yields, while rate cut expectations lower short-end and future rate paths; the outcome of this game will determine the shape of the yield curve and inflation compensation levels. In the stock market, the balance must be sought between profit expectations and discount rates—rate cuts favorable to valuation expansion and financing costs, but the controversies surrounding balance sheet reductions and inflation expectations will likely render risk premium contraction more restrained, especially for growth stocks that are already in overvalued territories.

The crypto market has consistently been highly sensitive to rate expectations and marginal changes in liquidity. Historical experience shows that whenever global risk-free rate expectations decline, and liquidity shifts from "tight" to "slightly loose," crypto assets are often rebranded as "high beta tech assets," following growth stocks to amplify volatility. However, when balance sheet reductions accelerate and risk tolerance cools, cryptocurrencies frequently take on the role of "leading adjustments," reacting to liquidity tightness with price changes before traditional assets. Given the current lack of accurate data on daily trading and on-chain funding, a more cautious judgement is that the market will look at the combination of rates and balance sheets with a longer-term perspective rather than focusing solely on day-to-day fluctuations.

If Miran's depicted scenario comes to fruition—inflation returning to target levels around a year, policy rates cumulatively lowered by about 1 percentage point, and balance sheets contracting at a controllable pace—then the role of "high beta tech assets" in crypto narratives may once again be reinforced. On one hand, lower rates and stabilized inflation expectations should enhance the appeal of long-term growth stories; on the other hand, if balance sheet reductions do not trigger severe financial turmoil, the overall tolerance for risk assets in the market will remain within an acceptable range. In this environment, crypto could simultaneously benefit from both "tech growth" and "risk appetite recovery" labels, although the pace will significantly depend on the collective expressions on the dual-track path in future FOMC meetings.

The Policy Game Is Not Over: From Miran to the Next Consensus Node

In summary, Miran's statements send a clear signal: the Federal Reserve is attempting to use separate operations for interest rates and balance sheets to reconstruct its policy toolbox. Balance sheet reduction is set as a more structured directional adjustment, aimed at returning to a more controllable and flexible balance sheet scale; while interest rates are treated as a more flexible regulator, providing certain support for the economy and market without undermining the anchoring of inflation expectations. If this approach gradually gains acceptance among more officials, future investors will need to get used to a "binary monetary policy world": merely focusing on the dot plot will no longer suffice; tracking the pathway of balance sheets will also be essential.

At the same time, it is worth noting that many unknowns remain in this statement. The specific scale and timeline of balance sheet reduction have not been disclosed, making it difficult for the market to evolve a clear quantitative pathway; public feedback from other FOMC members on Miran's views is also lacking, making it hard to judge whether this represents a personal forecast from one governor or a rehearsal for potential majority consensus. This state of incomplete information means that any predictions about the rate and liquidity environment for the next year must embed a wider bandwidth of uncertainty, and a single speech cannot be regarded as a commitment set in stone.

For investors, a more actionable strategy is not to bet on a single official's solitary statements but to build a more stable observational framework:

● First, continuously monitor whether inflation expectations are genuinely anchored, including the implied expectations derived from inflation-linked bonds and mid- to long-term inflation views from enterprise and household surveys.

● Second, closely track oil price trends and their changing weight in policy communications, determining whether the central bank continues to view it as a one-time shock or gradually incorporates it into more durable inflation risk assessments.

● Third, pay attention to future dot plots and meeting minutes to see how the relationship between interest rates and the balance sheet is articulated, and whether the combination of "balance sheet reduction + rate cuts" is being reinforced or recalibrated into a more traditional concurrent operation mode.

Looking ahead, if more Federal Reserve officials use similar phrases such as "rate cuts hedge the impacts of balance sheet reduction" or "do not obstruct AI from creating jobs" in public, the market will have reason to believe this is not just Miran's personal exploration, but an approach leaning towards a broader "dual-track operational consensus." At that point, the trading logic for crypto and risk assets will also evolve from a single-threaded "rate hike/cut cycle trade" to a multidimensional game around "rate path × balance sheet rhythm × technology and employment expectations."

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