Dan Elwell, acting head of the Federal Aviation Administration (FAA), said that at a minimum the planes would be forbidden to fly for weeks, although it could be longer after the second crash involving the new model in five months.
Flight ET 302, heading to Nairobi from Addis Ababa, crashed about 50km outside the Ethiopian capital six minutes after taking off.
That allows the company to avoid USA juries, which can award hefty punitive damages to accident victims for wrongful death, emotional suffering and economic hardships of surviving family.
In October, a Lion Air jet crashed in Indonesia, killing all 189 people on board.
Garuda now operates one Boeing 737 MAX 8, but the plane has been grounded along with 10 MAX jets owned by Lion Air Group, as per the government's instructions.
Attention has focussed since the Lion Air crash on an automated anti-stall system in the 737 Max that dips the plane's nose down.
This has raised fresh questions among regulators about a digital anti-stall system known as Maneuvering Characteristics Augmentation System, or MCAS, designed specifically for the MAX to offset the extra lift from larger engines mounted on its low-slung frame.
Moody's rating agency said the fallout from the crash would not immediately affect Boeing's credit rating.
Boeing spokesman Chaz Bickers said: "We continue to build 737 MAX airplanes while assessing how the situation, including potential capacity constraints, will impact our production system".
Askhara said his airline had made a decision to reduce the order from 49 "before the crashes". That means they could face an allegation of having sold a product that was inherently defective and unsafe.
Following the order, SpiceJet has announced cancellation of 14 flights and said that it will be operating additional flights from Thursday onwards.
The new information shows "the track of that airplane was close enough to the track of the Lion Air flight.to warrant the grounding of the airplanes so we could get more information from the black boxes and determine if there's a link between the two, and if there is, find a fix to that link", Elwell said on CNBC.
"Were there other efforts by Boeing to essentially minimize the problem or hide the scope of the problem?"
Kenneth Quinn, a lawyer who represents airlines and manufacturers, said he thought Boeing had a good chance of getting both sets of US cases dismissed on forum grounds. The US president said safety was of paramount concern.
"Garuda is reconsidering its upcoming order of 20 Boeing 737 MAXs after the two Boeing crashes", CEO Ari Askhara told reporters on Thursday, adding its only Boeing 737 MAX would stay grounded until "there's notification from the FAA".
Though it maintains the planes are safe, Boeing has supported the FAA move.