[The Squatter of Amon Rûdh]

Faërie is an old, old term that refers to a plane of existence beyond the physical yet short of the divine. The Elves are not the only inhabitants of Faërie in its traditional conception (which is fairly faithfully represented in Smith of Wootton Major), and it can be a perilous realm for mortals. The term pre-dates Tolkien by a very long time, and he simply used it when writing the early versions of his legends. In those days the link between the legends of the Elves and the physical modern world was much more direct, and I've a feeling that Tolkien wanted to imply that our use of the term was a result of it being a name for Eldamar.

There's a wealth of information about the Perilous Realm in Tolkien's lecture and essay On Fairy-Stories, which was delivered in memory of the famous scholar of myth and folklore, Andrew Lang.