Crazy move by Federer and the perfect reaction to it

Yes, and no. There are limits of course but this was a legal play.

No. It probably bounced from on court to off, that's why he had to dig for it.

But it's so far forward. He'd have to had hit it from basically the fence on the other side at a super lateral angle

They can go right up to the net to hit the ball. Also there is spin to consider. It's not even that hard to make a ball bounce completely sideways once it lands. Some players will put so much spin on the ball that instead of bouncing away from the net, and in the direction the ball was traveling, it instead reverses entirely and bounces into the net.