Paying interest on reserves allows the Fed to provide liquidity and maintain financial stability.
Over the past 15 years the Fed has engineered a fundamental advance in monetary policy by paying interest on reserves and supplying “ample” reserves…Banks holding lots of reserves don’t lend less. If the Fed buys Treasury bonds to create reserves, banks hold more in reserves and less in Treasurys. Money available for lending is the same…More deeply, we learned that the Fed can fully control the short-term interest rate by simply varying the rate it pays on reserves without having to ration money.