Authorizing the Federal Reserve to pay explicit interest on contractual clearing balances could potentially provide a demand for voluntary balances that would be stable enough for monetary policy to be implemented effectively through existing procedures without the need for required reserve balances.
In these circumstances, the Board, if authorized, could consider reducing--or even eliminating--reserve requirements, thereby reducing a regulatory burden for all depository institutions, without adversely affecting the Federal Reserve's ability to conduct monetary policy. Having the authority to pay interest on excess reserves also could help mitigate potential volatility in overnight interest rates.