For the last year, I've been writing columns that have outlined the fragile state the global economy is in. Equity markets generally lead broader economic activity, pricing in what is expected to happen in the future. Therefore, rallies in equity markets don't mean the economy has improved, necessarily, only that markets believe they will improve. There's also another state in which equity markets rally, one in which markets don't believe that markets will necessarily improve but one where the lack of growth in economic activity will force the hand of policymakers. In this case the economic outlook is so bad and growth is stagnant or negative that further accommodative steps, such as quantitative easing (where central banks purchase assets on the open market) are taken to stimulate growth. In a world where the U.S. Federal Reserve (Fed) Funds Rate is zero percent and trillions have been spent buying up assets, what else can the Fed do? An interesting answer has been put forward recently: Negative interest rates.

Negative interest rates are not a new phenomenon; however, they were recently re-introduced in a paper published last week written by a researcher at the Federal Reserve Bank of San Francisco. Seven years into the "new normal" - i.e., the post-Great Recession period - growth has not returned to global economic activity. Central banks have lowered interest rates to near zero, however, this has not been enough to stimulate growth to pre-Great Recession levels. The paper "Why So Slow? A Gradual Return for Interest Rates" says zero is not low enough.

Economists theorize that there is a natural rate of interest at which economies neither expands nor contracts. A rate higher than the natural rate adversely effects growth and the economy contracts. A rate lower than the natural rate stimulates the economy and the opposite, or the most elusive of monetary policy goals, growth, is achieved.

The author, Vasco Curdia, argues that the natural rate of interest since the 2008 crisis has actually been negative. Therefore, any interest rate higher than the natural rate, even zero, is actually hurting the economy.

Curdia goes on to calculate the current natural rate of interest and finds it to be -2.1 percent. Using data from the last 30 years, he calculates the historical natural rate of interest and extrapolates what the natural rate will be for the next five years. His predictions point to a natural interest rate above zero percent only by late next year. In a column I published last winter, I had predicted that the Fed would be hard-pressed to raise rates any time before mid-2016. My calculations weren't based on a natural rate of interest but on the stagnation that has taken hold of the U.S. economy and broader global markets. With unemployment rates at near full-employment in the United States, this statement might be surprising; however, the unemployment rate continues to ignore the millions of Americans that have dropped out of the employment market all together. The global recovery from the Great Recession has only helped the top tier of workers and those close enough to them to be impacted by their trickle-down spending, bringing employment participation rates to near 40 year lows.

The paper implies that any rate hike at this point would be premature and only push global economies back into an even greater recession. This "economic letter" published by the San Francisco Fed is of extreme importance, not only because of its substance but also because of the identity of its author. A colleague to one of the Fed's most influential consultants, Michael Woodford, Curdia's paper was published by the same Fed that was once headed by none other than Janet Yellen, current Federal Reserve board chair. Known as the economic powerhouse of the Fed, this economic letter is surely being digested by the Federal Open Market Committee, the rate fixing group within the Fed.

Let's assume that the heavy hitters of the Fed agree with this assessment, what can be done, and why all this posturing hinting that the Fed will act soon? The Fed may have no other choice than to hide the fact it thinks the economy is actually in much worse shape than it actually is. The placebo effect is real and reassuring the people that the economy is doing well might be the best tool left in the Fed's utility belt. What do zero percent rates really imply? How does this translate to actual policy? Answering this question will be the most difficult task the Fed has had to face in its history.

Let me close with a few ideas on what a negative natural rate of interest implies. It primarily signals further accommodative steps. This might mean cutting every taxpayer a check as the Bush administration did at the outset of the 2008 crisis. With low inflation and a strong dollar, what harm would come from sending every taxpayer a $3,000 check? It would give an instant shot in the arm to those struggling in the post-crisis period and would immediately spur consumption, the locomotive of the U.S. economy. The Fed could also buy bonds sold by the U.S. Treasury to finance a wide-scale infrastructure development project. Such a project would have spillover effects on the global economy and would yield by-products in the STEM realms. Instead of forgiving 2.1 percent of the amount the Fed lent out, it could take these steps to reach the natural rate of interest.