What if monetary policy is dead?

We think that the US Fed will be forced to normalise policy because of tightening labour markets. This would mark the start of our thesis of a global re-pricing of capital. The effect on overleveraged emerging market (EM) economies and currencies would be the most severe. But other currencies and economies will not escape unscathed. And global equities, where more than half of gains are due to multiple expansion, would contract as the rising cost of capital reduced the value of future earnings.
That’s our central scenario, but sound alternatives exist. This paper expresses one alternative view of the future — one in which capital does not get repriced.
What if inflation is not coming back, labour has lost its pricing power permanently and excess capacity is set to be a persistent drag? Equally, what if the credit multiplier is negative, sterilising the unconventional policy tools that central banks used to combat the financial crisis? Monetary policy would be impotent; the perception there is a zero-lower bound to nominal interest rates compromises control of real ones.
In such an environment, investment strategies would shift, but, surprisingly, not that substantially from our current investment thesis.

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