Federal Reserve Chairwoman Janet Yellen faced what may have seemed like an absurd line of questioning on Capitol Hill this week: Has the Fed considered negative interest rates? 

It's not a fantasy. At central banks around the world, negative benchmark interest rates have become the new normal, leading to some unusual paradoxes. In Denmark, instead of paying interest on their mortgages, many borrowers have been receiving payments from banks on their home loans. On the flip side, some Swiss bank customers have had to pay banks to keep cash in savings accounts. 

Yellen told Congress Thursday, following negative moves by central banks in Europe and elsewhere, the Fed has looked at the possibility of negative rates in the U.S. again. “We haven’t finished the evaluation,” she told lawmakers. “I wouldn’t take [them] off the table.”

With global economic tremors spreading, negative rates don't appear to be going away anytime soon. On Thursday, Sweden's Riksbank plunged its national benchmark interest rate to minus 0.5 percent, from minus 0.35 percent, a week after the Bank of Japan introduced negative rates for the first time in history. The European Central Bank (ECB), meanwhile, has maintained below-zero rates since June 2014. 

What does it all mean? Here are four fundamental questions about negative interest rates as the Fed grapples with going subzero. 

1. Why Negative Interest Rates? 

The basic logic of lowering interest rates when economic conditions turn south is to spur spending. If savings accounts aren’t accruing much interest, companies and savers are incentivized to spend the cash or invest elsewhere, stimulating the economy.

But the length and depth of global economic malaise following the 2008 financial crisis forced central banks to grapple with truly extraordinary measures. The Fed, stuck at near-zero interest rates, embarked on quantitative easing, the large-scale purchase of trillions of dollars in financial assets meant to goose markets and promote growth. 

Faced with ongoing economic weaknesses in the eurozone, the ECB in 2014 made the historic decision of pushing interest rates to minus 0.1 percent in what ECB President Mario Draghi called a “combination of measures to provide additional monetary policy accommodation and to support lending to the real economy.”

The ECB's historic decision was followed by negative rate moves in Sweden, Switzerland, Denmark and Japan.

2. How Do Central Banks Go Negative? 

Monetary policymakers set a floor for borrowing costs using what are called benchmark interest rates, essentially what major banks pay each other to borrow funds. In the U.S., large depository institutions are required to keep some reserves at the Fed. If there are excess reserves, banks can use them make short-term loans to other institutions at a rate set by the Fed. This is the federal funds rate. 

In 2008, the Fed pushed the federal funds rate to virtually zero, bringing borrowing costs for mortgages, credit cards and personal loans down in turn. 

In going negative, central banks essentially reverse the ordinary relationship between lender and borrower. Instead of receiving interest on reserve funds, banks are charged on their cash. If the benchmark is low enough for long enough, negative rates can ripple out to retail savings accounts and mortgages, as in some parts of Europe.  

3. What Barriers Does the Fed Face? 

In a question-and-answer session with the House Financial Services Committee, Yellen faced withering scrutiny on the topic of negative rates. Rep. Patrick McHenry, R-N.C., put the question bluntly: “Does the Federal Reserve have the legal authority to implement negative rates?”

Yellen didn’t have a firm answer. “We didn’t fully look at the legal issues around that,” Yellen said. “That remains a question that we still need to examine more thoroughly.” Potential legal barriers include a 2006 law that empowers the Fed to pay banks interest on reserves held there — a policy that itself has come under fire — which specifies that depository institutions “may receive earnings” from the Fed. To go negative, the Fed may need to convince legal authorities that the earnings paid can be negative. 

A recently unearthed 2010 Fed memo referenced in the hearing made clear that not only were there legal concerns, but practical ones. For starters, computer systems used by the Fed “do not currently allow for the possibility of a negative” rate of interest paid to banks, known as the interest on excess reserves or IOER. 

In all, Yellen remained skeptical how negative rates might play out. “We were concerned about the impact it would have on money markets, we were worried it wouldn’t work in our institutional environment,” Yellen said. “Could the plumbing of the financial infrastructure of the United States handle it?”

There might also be political pushback. Analysts at JPMorgan Chase & Co. called the Fed’s political situation “more parlous” than for its international counterparts. “The hurdle for [negative rates] in the U.S. is quite high, and we would need to see recession-like conditions before the Fed seriously considered the option.”