Central banks hold steady as semiconductor volatility returns

In celebration of National Intern Day, this week's episode is presented by Hailey Jarrett, an intern in Russell Investments' Seattle office.

Key takeaways

• The Fed and Bank of England both held rates steady this week
• Semiconductor stocks saw sharp swings as AI expectations were reassessed
• Strong earnings continue to support the broader equity backdrop

It was a busy week for markets, with the Federal Reserve and the Bank of England both deciding to hold rates steady.

In the U.S., the Fed’s 9-3 decision was broadly in line with expectations, although markets had been less certain heading into the meeting. One reason for that uncertainty is Fed Chair Kevin Warsh’s preference for less forward guidance, which leaves investors with fewer clues about the path ahead for rates.

That can create more volatility in fixed income markets, as investors are forced to rely more heavily on incoming data. Even so, we continue to think U.S. government bonds remain attractive. Inflation is still elevated in the short term, but medium- and long-term expectations remain anchored, while the labor and housing markets do not appear overheated. On balance, we continue to think a rate hike in 2026 is unlikely.

The Bank of England also held rates steady, with a 6-3 split. Governor Bailey signaled that if inflation remains persistent, further rate hikes could be needed. However, the UK economy remains under pressure, with weak growth and elevated unemployment. Any near-term tightening may ultimately need to be followed by steeper cuts to support activity. For now, we continue to see value in UK gilts.

Semiconductor stocks were another major focus this week.

On Wednesday, both South Korean equities and U.S. semiconductor stocks fell sharply as investors continued to question the pace and sustainability of the AI buildout. Those moves were partly reversed on Thursday, but the week still highlighted how sensitive the sector has become to shifts in investor expectations.

Even with that volatility, the broader earnings picture remains supportive. U.S. companies are still tracking earnings growth in excess of 25% year over year, and expectations remain solid outside the U.S. as well.

That leaves the equity market backdrop intact, even if there are occasional near-term pullbacks in areas that have run hard.

For investors, the message remains the same: stay diversified and keep a long-term focus.