• The Federal Reserve has raised rates by 75 bps as expected. 
  • Hopes for a slower pace of rate hikes have weighed on the dollar. 
  • A hangover from the initial euphoria is likely – even without strong US data.

The Federal Reserve is data dependent – that is the sole message traders need to take from the critical rate decision. The world's most central bank raised borrowing costs by 75 bps to 3.75-4.00% for the fourth consecutive time in this November meeting, but markets were already looking into December. That explains the cheerful market reaction.

Investors had already been clamoring for a dovish message from the Fed, clinging to any hint that the bank would slow the pace of hikes, starting from a 50 bps next month. They received their subtle hints from Fed Chair Jerome Powell.

Here is the market's goldmine, emphasis mine:

In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments

These lines imply that the Fed has done enough and may want to take stock of everything before continuing to act. 

Is it a commitment to raise rates by only 50 bps in December? Not so fast. First, the Fed also takes inflation into account  and "economic and financial developments." It remains data-dependent and data could imply further hikes. 

Secondly, the sentence before the one above consists of a firm commitment to act. 

The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.

Fed officials maintain their tough talk on inflation – and they need to while the labor market is on fire and after core inflation hit the highest in 40 years. They need to be Rocky Balboa on inflation when their measure of inflation is at the highest levels since Eye of the Tiger was No. 1 on the charts. 

The Fed has shown its ability to change its mind in response to the data, and there is lots of data until December. The Fed's two mandates are price stability and full employment. Two inflation reports and two Nonfarm Payrolls releases are due between now and December. 

I argue that a strong data release is unnecessary to see the dollar recover. This relief rally has weak legs to stand on. Stocks may be experiencing a "bear market rally" – these are the strongest and prove premature. 

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