The US Federal Reserve Bank (Fed) has cut interest rates by 50 basis points in an attempt to stave off an ever-worsening financial crisis.
Global markets bounced back on Friday after the Fed cut its discount rate to 5.75 per cent, following a week where markets around the world had dived.
"This is a huge turnaround for the Fed which just over a week ago was more concerned about inflation than growth," AMP head of investment strategy and chief economist Shane Oliver said.
The key Fed funds rate remained unchanged at 5.25 per cent, but this may change if the latest move by the Fed fails to halt the chaos.
"It looks like it is now on track to cut it as well, probably by 0.25 per cent, but maybe even by 0.5 per cent, at its next meeting on September 18th. The Fed Funds rate may be cut even earlier if markets don't quickly settle down," Oliver said.
"The Fed is rightly concerned that if this crisis of confidence is allowed to continue then it will harm good quality borrowers and severely threaten the US economy. There is simply no reason to let this happen."
According to Oliver, there is now also a greater chance of a domestic rate cut.
"Our assessment remains that the current problems in financial markets and the risks they pose to the economic outlook, as reflected in the Fed's move to cut interest rates, are likely to see Australian interest rates remain on hold for the rest of this year, with a rising possibility of a cut," Oliver said.
Over the last four weeks Australia has experienced four of the 10 biggest daily falls of the last 10 years.
The Dow Jones rose 300 points, or 1.8 per cent, in the last hour of trading on Friday to close at 13,079.1, while the UK FTSE 100 gained 3.5 per cent or 205.3 points to finish at 6,064.2.
