"Of course, we've looked at it and thought about making preparations and so on," Fed Chairman Ben S. Bernanke said at a July 13 congressional hearing, without elaborating.
He said a default would be a "a major crisis" that would "throw shock waves through the entire global financial system."
At another hearing the next day, Bernanke said he wanted to "eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt."
'Major Crisis'
Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York, said the Fed might try to ease any credit strains caused by a default by allowing banks and other financial firms to temporarily lend their Treasury securities to the Fed in exchange for cash.
Feroli said the Fed could also lower the interest rate banks pay to borrow directly from the central bank through the so-called discount window, now 0.75 percent. U.S. Treasury securities can be pledged as collateral for those Fed loans.
For financial companies other than banks, the Fed could create a program that would allow them to temporarily exchange Treasury securities for short-term loans, Feroli said.
"In general, I think they'd want to temporarily substitute the Fed's credit in place of the Treasury's credit," said Feroli, a former Fed researcher.