Read the following blog from the Federal Reserve Bank of San Francisco to answer the following questions:

https://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves/

Links to an external site.

Questions:

1) Why did the Fed start paying interest on central bank reserves that commercial banks have on deposit at the Fed?

2) Why does the effective federal funds rate sometimes fall below the interest rate paid on central bank reserves that commercial banks have on deposit at the Fed?

https://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves/