Repo Disruption Isn’t a Sign of a Systemic Problem, Blackstone’s James Says

(Bloomberg) -- Action from the Federal Reserve to calm money markets this week isn’t a sign of a systemic problem that will affect the economy, according to a senior executive at Blackstone Group Inc.

The Fed bought $53.2 billion of securities on Tuesday and said it would conduct another overnight repo operation of up to $75 billion Wednesday to ease a surge in short-term rates. Money markets saw funding shortages Monday and Tuesday, driving the rate on one-day loans backed by Treasury bonds -- known as repurchase agreements, or repos -- as high as 10%.

Repo Disruption Isn’t a Sign of a Systemic Problem, Blackstone’s James Says

“The Fed’s got the tools to solve these short-term problems, and I don’t think they ripple through to the basic economy,” Tony James, executive vice chairman at the New York-based private-equity firm, said on Bloomberg TV in Sydney. “These are more of interest to dealers and trading markets than the real economy.”

Fed overnight system repos were once a regular part of the central bank’s operations, but were discontinued as the Fed expanded its balance sheet during and after the financial crisis.

“I don’t think the repo market is broken at all,” James said. “This kind of thing used to be common. They haven’t had to do it in a long time, but I think it’s important to remember the rate spike looks very scary but it’s only overnight. So the actual cost to the system is not high; it’s more of a concern to dealers -- it’s a technical problem.”

James added that he wasn’t surprised the Fed stepped in to ensure stability. What’s less clear is how the central bank manages its balance sheet over time. The Fed called a halt to shrinking its bond holdings earlier this year.

“The winding down of that balance is a whole other issue -- my own view is that will be with them a long time,” he said.

©2019 Bloomberg L.P.

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