U.S. Senate leaders are discussing a fallback plan that could see a resolution to the stalemate dogging talks over how to deal with the U.S. government's debt woes.
Republican and Democrat leaders have been trying to hammer out a deal that would raise the country's debt limit and avoid a potentially dangerous default on Aug. 2.
While talks were underway for a fifth consecutive day at the White House, Senate Majority Leader Harry Reid and Republican leader Mitch McConnell were at work on a plan that would give President Barack Obama more power to increase the debt limit while paving the way for possible federal spending cuts.
"We're going to continue to discuss a way forward over the next couple of days and see what happens," McConnell said.
The seriousness of the country's federal debt crisis was highlighted earlier in the day, as the chairman of the Federal Reserve warned that putting off raising the government's borrowing limit would deal a "self-inflicted" blow to the American economy.
Ben Bernanke told a Senate panel Thursday that defaulting on U.S. debt payments would boost federal deficits and interest rates, slowing the economy's already tenuous recovery.
"I think it would be a calamitous outcome and create a very severe financial shock," he said before the Senate Banking Committee. "I would urge Congress to take every step possible to avoid defaulting on the debt or creating even any significant probability of defaulting on the debt."
Legislators have just two weeks to raise the debt limit. Obama has demanded that negotiators come to an agreement by the end of the week.
On Wednesday, a fed-up U.S. President Barack Obama declared "enough is enough" and left unproductive meetings at the White House, saying "I'll see you all tomorrow."
Meanwhile, Wall Street was nervously eyeing the talks with experts warning that catastrophe could follow if the U.S. defaults on its debt obligations. If Moody's Investors Service, which is reviewing the U.S. government's credit rating, were to lower the credit rating there would be deep economic consequences for the American economy, likely affecting a wide swath of lending rates.
Credit rating agency Standard & Poor's has also warned that due to the political impasse, there is a 50 per cent chance it will downgrade the U.S. government's credit rating by the end of September.
The crisis began when the U.S. hit its debt ceiling of $14.3 trillion in May. If that ceiling is not raised by Aug. 2, the Obama administration maintains, the federal government will default on its obligations.
According to Senate Majority Leader Harry Reid, defaulting would mean social security cheques, veterans' benefits and military paycheques could all stop.
"Millions of Americans could lose their jobs," he added.
The Republicans, who control the House of Representatives, have called the message a scare tactic.
They maintain they won't agree to the increase unless Obama commits to an equal amount of deficit cuts over the next 10 years.
According to The Associated Press, the debt ceiling would have to be increased by about $2.4 trillion in order to keep the nation out of default until the end of 2012.
However, Republicans say Obama has only offered about $1.4 trillion in spending cuts over the next 10 years, mostly in domestic and defence spending.
The White House claims the total is closer to $1.7 trillion.
Wednesday's bitter tone continued on Thursday with various legislators taking turns criticizing their opponents, blaming Obama or questioning the legitimacy of others.
Reid stood in the Senate to say that House minority Leader Eric Cantor shouldn't be part of the talks, pointing out that he has been described as "childish."
McConnell, a short time later, stood up and laid blame for the debt crisis squarely at Obama's feet.
"Republicans will not be reduced to being the tax collectors for the Obama economy," McConnell said. "Don't expect any more cover from Republicans on it than you got on health care. None."
With files from The Associated Press
