Fed Quick Analysis: Powell abandons guidance, market cheer may prove short-lived

• The US Federal Reserve has raised rates by 75 bps as expected to around 2.50%.
• An acknowledgment of some softening has been balanced by comments about a strong economy. 
• Fed Chair Powell has dropped guidance, moving to a meeting-by-meeting basis.
• Markets cheer lower chances of tougher policy, and it may prove short-lived. 

"We think it's time to go to a meeting-by-meeting basis" – investors have seen this key quote as lowering the chance for yet another 75 bps rate hike in September. Markets are up, the dollar is down. Federal Reserve Chair Jerome Powell has also skipped a chance to push back against market expectations for rate cuts next year. 

Is this rally justified? Another quote by Powell, that the Fed is looking for "compelling evidence that inflation is falling" may be interpreted as the Fed is in search for an excuse to slow down. It seems markets were on a quest to take profits on dollar longs, and for a "buy the dip" reaction in markets. However, it may prove short-lived.

After the Fed raised rates by 75 bps as expected, it only provided token acknowledgement of some moderation in economic activity: However, it is followed by the word "nonetheless" and then talk about economic strength:

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Moreover, a meeting-by-meeting basis also leaves room for nasty upside surprises in inflation and further strong job reports. The current repricing of September's rate hike seems premature. There are two inflation reports and two Nonfarm Payrolls ones ffrom now unitl the next Fed meeting on September 21. 

Being more data dependent means more market volatility – and that can go both ways. 

Perhaps the first sign of weakness would come from weekly jobless claims. An increase to above 300,000 would lower Fed expectations and push the dollar further down. However, while that isn't happening, the upcoming inflation report could send the dollar skyrocketing. 

All in all, the current swing could be premature.