The Eunuch class...

...expounding upon my previous post.

The below snippet from a Fed official mentions the use of "strict scrutiny" in the formation of Fed policy.

This is a curious use of a LEGAL term of art. It is very instructive to note the gravitation towards using terms like "strict scrutiny" for the purpose of bolstering Fed legitimacy, it is also illuminating to note the Fed taking on analytical mechanisms steeped in an entirely different branch of Government.

Strict Scrutiny is applied by courts typically in challenges to legislation that impedes or infringes on Constitutional rights. It has never been applied to internicine conflicts between bearocraticies as a legal concept.

Nor is there precedent for Fed officials to review Fed policy with different levels of "scrutiny" ex-ante, and there are no records or references in Fed minutes to differing levels of scrutiny.

A very strange use of words, and the only effect achieved is one of signalling in furtherance of bolstering perceived legitimacy.


June 28 (Bloomberg) -- Federal Reserve Governor Kevin Warsh said any decision by the central bank to expand its $2.35 trillion balance sheet must be subject to “strict scrutiny.”

Warsh, in a speech in Atlanta, said he would need to be convinced that the economic benefits of such a move “outweighed any costs owing to erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility.”

Fed policy makers last week signaled Europe’s debt crisis may harm the U.S. economy, saying “financial conditions have become less supportive” of growth and repeated a pledge to keep interest rates near zero “for an extended period.” At the same time, officials are laying plans for an eventual exit from record monetary stimulus to head off an outbreak of inflation.

Analysts including Avery Shenfeld, chief economist with CIBC World Market in Toronto, and former Richmond Fed President J. Alfred Broaddus have said weakness in the economy increases the chances the Fed would resume expanding its balance sheet. The Fed bought $1.6 trillion in housing debt and Treasury securities since late 2008 as it battled the financial crisis.

“Some believe the Federal Reserve should do more, including expansion of its balance sheet,” Warsh said. “In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny.”

Warsh, echoing some of the language of the Federal Open Market Committee’s statement, said the recovery is “proceeding” and the “labor market is improving, albeit gradually.” He added that “employers appear quite reluctant to add to payrolls,” and that most broad inflation measures “remain subdued.”