Fiddlesticks is not trapped in a cage. It wears a cage. Same as the sack that is the scarecrow's "face". The demon can very clearly reach its limbs out of the cage and use them. It's even more apparent if you watch Fiddlesticks use Crowstorm. The demon frees itself from the cage entirely.
"Fiddlesticks" is a being from folklore, like our Boogeyman. "The Boogeyman" is no single entity, but a conglomeration of fears and scary things. Now, there is a fear demon that possesses a scarecrow it cobbled together with sharp, rusted metal. The name "Fiddlesticks" became attributed to this demon. This is very much like how "Tahm Kench" was actually the name of a gambler who made a deal with a demon known as "the River King", but the name Tahm Kench became associated with the demon himself.
As far as Zoe is concerned: long ago, back before she ever became the Aspect of Twilight, she heard the tale of Fiddlesticks stalking through the night. And as a child, this story frightened her. But that was a long time ago. She's witnessed things far more powerful and terrifying than a simple fear demon, and now, face-to-face with the manifestation of primal horror, she finds it more charming than frightening. As if she were seeing it in its "Surprise Party" skin. A demon that goes around sneaking up on people to jump-scare them? As the trickster Aspect and embodiment of mischief, this demon is right in her wheelhouse.
The demon, too, finds this girl to be a curiosity. Where it had expected a shriek from her, it instead got a giggle, a reaction it had never received before. Refreshing, in a strange way. If the demon is to be able to frighten this child, it will need to become even more terrifying than it already is. The demon eagerly accepts the challenge, but something should commemorate the occasion.
Zoe takes a key from around the scarecrow's neck. Those ancient, rusted keys had long outlived their original purpose, and only served to rattle and clank as the scarecrow hobbles in pursuit of the demon's next target, like a horrible wind-chime. But this key, now in the hands of a girl who laughs in the face of terror, would mark their encounter. Ever since then, Zoe has kept the key close, because this key represents a promise that the two will meet again.
And when they do, the demon plans to give her the scare of her life.
