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Would the Fed ever turn to negative interest rates?

The idea that the Federal Reserve might take interest rates below zero in hopes of stimulating economic growth has recently picked up steam in financial markets. On Wednesday, Fed Chair Janet Yellen acknowledged that she's not certain the central bank could legally implement the scenario.

During her testimony to the House Financial Services Committee, Yellen said she did not foresee the Federal Open Markets Committee (FOMC) being in a situation anytime soon where it would see a need to cut rates. Still, the possibility of negative rates is something the Fed should look at, given Europe's experience, she added.

The European Central Bank and the Bank of Japan recently reduced their benchmark rates into negative terrain in an effort to add further stimulus.

The issue has presented itself in the U.S. amid worries about the global economy and what tools the Fed has at its disposal to fight another downturn, given it only in December hiked short-term interest rates off record lows for the first time since 2006.

Responding to questions from lawmakers, Yellen said: "I am not aware of anything that would prevent us from doing it, but I'm saying we have not fully investigated the legal issues -- that still needs to be done."

"I would say that remains a question that we would still need to investigate more thoroughly," Yellen added.

The question in question is whether or not the law that gives the Fed the power to pay banks interest on reserve balances deposited at the Fed -- the Financial Services Regulatory Relief Act of 2006 -- also empowers it to charge interest.

For Yellen, the issue goes beyond one of legality. "Could the plumbing of the payment system in the United States handle it? Is our institutional structure of our money markets compatible with it? We've not determined that."

But from Yellen's public stance, the Fed continues to anticipate a gradual rise in rates by the central bank, even as the recent upheaval in the markets and uncertainty about global economic growth could take the Fed off course from the four increases that had been forecast by the Fed this year.

The monetary policy makers next gathering to mull a rate increase comes at a two-day session starting March 15.

While Yellen is not ruling out an increase next month, fed funds futures are pricing in no hikes this year.

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