Transcripts

An Economic Financial Meeting of the Minds

PAUL KANGAS: Federal Reserve Chairman Ben Bernanke heads to Capitol Hill tomorrow to meet with Senate Banking Committee Chairman Chris Dodd and Treasury Secretary Henry Paulson. Dodd called the closed door meeting to talk about the recent volatility on Wall Street. But while the stock market has been grabbing headlines, it's not the main concern of the Federal Reserve. Central bankers are focused on the credit markets that function like the plumbing in the nation's financial system. Darren Gersh explains.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is a good chance that your auto loan was financed with help from the nation's $2 trillion credit markets. The same goes for the lease on that back hoe you passed on the way to work. Simply put, America may invest through the stock market, but it does business through the credit markets, which is why, when credit markets get in trouble, the Federal Reserve rolls up its sleeves and gets to work. Money manager Michael Farr says he and other financial pros recognize this fact, to a point.

MICHAEL FARR, CHIEF INVESTMENT OFFICER, FARR, MILLER & WASHINGTON: I think the stock market understands that it's not the Fed's main concern, but I don't think that the stock market actually believes it. It is sort of like hearing your parents say I don't have any favorites among my children and secretly suspecting that you're still probably it.

GERSH: When stock prices are high, investors feel wealthy and eventually they spend more, boosting the economy. Credit markets by contrast, have a more immediate impact on business spending. Safeway sold $500 million in bonds last week, Wal-Mart, $2.7 billion. That's cash that can be used to stock shelves or build stores. Former Federal Reserve Board Governor Susan Phillips says Fed Chairman Ben Bernanke and his colleagues control the benchmark interest rate that helps set prices across credit markets.

SUSAN PHILLIPS, DEAN, GEORGE WASHINGTON SCHOOL OF BUSINESS: They don't directly intervene in the stock market. They intervene in the bond market and that will secondarily affect the stock market. So they don't target the stock market, but they are clearly aware of the stock market.

GERSH: The Fed doesn't believe it has much immediate impact on stock prices. In research a few years ago, Ben Bernanke concluded an unexpected change in the Federal funds interest rate of a quarter point will move stocks roughly one percent -- about what they move on any given trading day. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.