The Federal Reserve is preparing for the consequences of the U.S. government defaulting on its debt obligations, Reuters reports.

"We are in contingency planning mode," Philadelphia Federal Reserve Bank President Charles Plosser told Reuters in an interview at the regional central bank's headquarters in Philadelphia. "We are all engaged ... It's a very active process."

The Fed clears all of the government's checks, so it must determine which will and won't be honored once the debt limit hits on August 2nd.

"We are developing processes and procedures by which the Treasury communicates to us what we are going to do," Plosser said, adding that the task was manageable. "How the Fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good?"

Read the full report here: