But violence has continued throughout the country. Dozens of people were killed last weekend when Muslim Brotherhood supporters clashed with their opponents and security forces.
The statement issued on Wednesday suggested the move could be reversed if the govern0ment took steps to restore democracy.
"We will continue to review the decisions regarding our assistance periodically and will continue to work with the interim government to help it move toward our shared goals in an atmosphere free of violence and intimidation," Psaki said.
On Tuesday, Amnesty International sent a letter to Obama urging the United States to not facilitate arms for Egypt.
"The U.S. government needs to stop providing arms or allowing back door sales of weapons or equipment that Egypt's security forces will likely use to violate human rights," Frank Jannuzi, the group's deputy executive director, said.
"Before sales resume, Egyptian authorities must investigate and prosecute those responsible for recent incidents of excessive force. Otherwise, the Obama administration will be giving a 'get out of jail free' card to those who have violently suppressed peaceful protestors," he said.
CNN senior international correspondent Ben Wedeman said in the short-term, the U.S. decision could have a positive impact in Egypt.
"Immediately, probably, the Egyptian government is going to find it's going to gain somewhat in terms of local public opinion," Wedeman said. "Egyptians I've already been in touch with about this decision or announcement from the United States that it's going to cut aid seem to react positively. There seems to be a lot of frustration with the United States, given its role in Egypt over the last two-and-a-half years since the revolution."
But don't expect to see Egypt's military hurting financially, Wedeman said.
"For the Egyptian government, a cutoff in U.S. aid is symbolically significant, but in terms of the actual amount of money they're getting, it will not make a big difference," he said.
Wedeman said Gulf states have been pouring billions into Egypt since Morsy's ouster. A move to cut off aid would likely anger those allies who have urged the United States to support the military and warned against stopping assistance.
Sen. Patrick Leahy, a Vermont Democrat who chairs the appropriations panel that funds U.S. assistance to Egypt, said federal law "is clear" and requires that aid be severed in the event of a coup.
"Rather than encourage reconciliation and restore democracy as it promised, the Egyptian military has reinstituted martial law and cracked down on the Islamic opposition, which has also used violence," he said in a statement. "The administration is trying to have it both ways, by suspending some aid but continuing other aid. By doing that, the message is muddled. If they want to continue aid to the Egyptian government they should ask Congress for a waiver."