Bill Dudley on scarce reserves

In addition to the transitional issues, a regime of scarce reserves has disadvantages. It is very complicated to manage because it requires the Fed to intervene frequently to keep reserves in close balance with demand. For example, in the past, the Treasury had to keep its cash balance at the Fed low and stable so that fluctuations did not make it difficult for the central bank to maintain control of short-term interest rates. Banks satisfied reserve requirements over a two-week reserve maintenance period to make it easier for the Fed to match demand and supply.

Also, scarce reserves are incompatible with open-ended backstop facilities that can support confidence during times of stress. In an open-ended backstop, there is no risk that the central bank will exhaust its lending capacity. In contrast, when the amount of funds on offer is limited, there is an incentive to access the facility quickly before the funds run out. An open-ended facility is superior in maintaining and restoring confidence in the system. In contrast, a scarce reserves regime undermines the ability of the central bank to fulfil its lender of last resort function — the reason why the Fed was established in the first place.

Part of the subtext here is a desire to continue paying interest on reserves.  Here is more from Bloomberg.  Here is some analysis from 5.2 Pro, including a look at what Scott Sumner would say.