Inflation and central bank actions

In general, central banks increase base rates when the inflation rates increase beyond central banks' targets and decrease base rates when the inflation rates fall below the targets. However, in the complicated real world, inflation rates in different countries are different and countries are trading with each other, it is too complicated for central banks to know whether it is absolutely right to increase base rates or not. Currently, the US inflation rate is approaching the Fed's target; however, though the Fed has shown its plans of rate hikes in multiple occasions, it has not made any actual rate hike move yet. Meanwhile, the inflation rates in other countries such as Germany are slowing down below the targets. However, the central banks in these countries (particularly the ECB) have not lowered their rates, instead, some announce they may reverse their expansionary monetary policies.

Under such circumstance, central banks do not follow their own guidance. When they do not follow their guidance, the financial market is likely to react to the central banks only when they make actual policies; otherwise, the announcements from central banks only create shocks in the financial market. In addition, central banks tend to lag behind the economy that they do not react to the market expectation but the actual market performance. This creates a problem that the market does not perform in the way central banks want but central banks may react to the market in the way that the market wants or the financial institutions want.