I am curious to hear what economists think might happen if the Fed stopped paying interest on reserves held in excess of the penalty free upper bound. I am also curious to know how economists think this practice might be fazed out gradually in such a way that the Fed could mitigate the negative effects that might accompany a sudden and complete cessation of the practice.
For example - If banks stop earning risk-free profit on these reserves (current at .25 percent, I think) would they feel compelled to channel these excess funds into profitable loans? Perhaps this is a way the Fed could keep interest rates low after ending QE practices? Would ending the interest payments overnight cause banks to start lending such that we would experience significant inflation?
Any feedback, papers, etc. much appreciated!