Moody's to review US triple-A debt rating
Ben Bernanke said the Fed expects to keep interest rates near zero "for an extended period"
Ratings agency Moody's has warned it may cut the US AAA debt rating because it is increasingly likely its debt ceiling will not be raised in time to avoid a default.
It has placed the US on a downgrade watch, saying the likelihood of a default was "low" but not "de minimis".
Federal Reserve head Ben Bernanke said earlier a default would send shockwaves through the entire financial system.
He said the Fed would renew stimulus efforts if the economy remained weak.
'Small but rising risk'
Moody's became the first of the big three ratings agencies - the others being Standard & Poor's and Fitch - to place the US's triple-A rating on review for a possible downgrade.
"The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes," Moody's said.
"As such, there is a small but rising risk of a short-lived default."
The US hit its $14.3 trillion debt ceiling on 16 May but has since used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating.
Republicans are refusing to lift the ceiling without deep government spending cuts.
'Prepared to respond'
Earlier, Fed chairman Mr Bernanke gave his semi-annual monetary policy report to members of Congress.
The Fed's second quantitative easing programme (QE2) ended two weeks ago, and there has been much speculation about whether a QE3 programme is on the cards.
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The hurdle for a QE3 is too high right now, but if the European peripheral crisis intensifies, further policy accommodation might be considered”
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Dana Saporta
Credit Suisse economist
"Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation," Mr Bernanke said.
"However, given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Federal Reserve remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate."
He also said the US could expect only "moderate" growth over the coming quarters.
He added that the inflation pressures seen in the first half of 2011 were "transitory" and should ease, citing higher commodity prices and the earthquake in Japan, which led to parts shortages and drove up vehicle prices, as reasons for why inflation picked up.
The Fed expects to keep its ultra-low interest rate policy in place "for an extended period", he said.
Revised forecasts
The dollar extended earlier losses against the euro following Mr Bernanke's comments, with the euro rising more than a cent to $1.4088.
He added that Fed forecasts for June, which had already been significantly revised down from April, had not incorporated recent data such as last week's employment report.
That data showed that job creation all but ground to a halt last month, with only 18,000 new jobs created, and the unemployment rate rising to 9.2%.
Analysts said that Mr Bernanke had only raised the possibility of a further stimulus, and was not saying that it was necessary.
"In general, Bernanke's testimony has not changed our view that monetary policy is on hold," said Dana Saporta, economist at Credit Suisse in New York.
"The hurdle for a QE3 is too high right now, but if the European peripheral crisis intensifies, further policy accommodation might be considered."
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