What negative rates mean for average investors

CNBC reports:

Despite the Federal Reserve raising its overnight rate in December, an increasing number of people are now calling for the Fed Fund rate to go negative. The chatter around negative rates has become so loud that Janet Yellen addressed the issue on Wednesday saying that while there may be legal issues with lowering rates below zero, the central bank can likely do it if it wanted to.

The hope is that negative rates will force banks, which store money at the Federal Reserve, to spend their cash rather than pay the central bank to keep it. That would in turn spur the economy. But what often gets lost in this discussion is what happens to the average investor — and the outcome isn't pretty.

In theory, falling interest rates should increase stock markets — and low rates over the past few years has boosted equities. That's because when rates drop, investors have to buy stocks — and usually high-yielding ones — to make any money. However, that's not what's happened in regions that have already gone negative.

In June 2014, the European Central Bank's deposit rate was cut to –0.1 percent. Since then, the iShares MSCI EMU Index ETF — a security that tracks an index composed of large- and mid-cap companies located in euro zone countries — is down nearly 30 percent.

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