There is no law or flag code that supports this. Those who subscribe to this theory will often point to executive order 10834; however, the text that they cite is completely fabricated.
While there are no U.S. laws on flag fringe, it is mentioned in U.S. Army code. Army Regulation 840-10 states that fringe should be used on indoor and ceremonial flags, but does not state any reason why.
So in conclusion, it’s all for decoration. Most likely a military tradition that has been adopted by civilians.