Jason Reed / Reuters

Watch that fiscal cliff. Fed chairman Ben Bernanke departs a news conference following the monthly two-day meeting at the Federal Reserve in Washington, April 25, 2012.

Fed Chairman Ben Bernanke calls it the “fiscal cliff.” It might be better thought of as the next economic Armageddon.

Unless Congress acts to soften the blow, economists are warning that a looming year-end collision of massive, “automatic” cuts in federal spending and the expiration of sweeping Bush-era tax cuts could crush an already weak U.S. economic recovery.

And unlike the central bank’s response to the Panic of 2008, the Fed would be powerless to offset the catastrophic impact on the economy and financial markets.

"There is absolutely no chance that the Federal Reserve would be able to have the ability whatsoever to offset that effect on the economy," Bernanke told reporters Wednesday, following a two-day meeting of the Fed's policy-making committee.

The risk of a potential economic train wreck stems from a series of contentious political decisions that Congress has been ducking for years, postponing a long list of tough choices until the end of the year, until after the national elections.

Now, unless a compromise is reached, sharp cuts in federal spending will remove hundreds of billions of dollars from the U.S. economy, virtually overnight. At the same time, American consumers will see a massive increase in taxes that will sharply curb their spending power, taking another big bite out of the economy.

While it was ducking those big decisions, Congress has also punted on a series of smaller budget measures that will have to be decided by next year. Taken together, they add up to some big numbers.

The lists includes two long-running budget items that have become a popular perennial target of political horse trading. One is the now-annual "fix" to scheduled cuts in Medicare payments that would reduce spending on doctors' fees by as much as 30 percent. The other is a so-called "patch" required to prevent the Alternative Minimum Tax from hitting an ever-wider swath of middle class households.

Wage earners are also set to lose the payroll tax cut that expires at the end of this year. An extension of long-term unemployment benefits is also set to expire, which would further slash the amount of money flowing through the economy.

Economists and budget analysts have offered up various estimates on just how badly the economy would be damaged if Congress fails to act in time. The combination of the tax increases and spending cuts would amount to more than $6.8 trillion over 10 years, according to the Committee for a Responsible Federal Budget, a non-partisan think-tank whose board includes former members of Congress and budget directors.

The Congressional Budget Office predicted earlier this year that the full impact of those tax hikes and spending cuts would remove about 3.5 percent of gross domestic product, more than wiping out the current recovery. That would send the unemployment rate, which stood at 8.2 percent in March, to 8.9 percent by year-end and 9.2 percent at the end of 2013.

Some economists argue the hit to GDP could be even greater.  Morgan Stanley economist David Greenlaw figures the hit from the fiscal cliff would amount to more like 5 percent of GDP in 2013.

Others, like Deutsche Bank economist Joseph LaVorgna, think those estimates are overblown, though his assessment assumes Congress gets its act together and steers away from the cliff at the last minute. 

But there's widespread agreement that if lawmakers ultimately pull a "Thelma and Louise," the economic impact of these tax and spending changes would be devastating if they hit all at once.

As Congress quibbles bitterly over how to cut the federal deficit, lawmakers generally agree that failing to do so would have dire long-term consequences. But, as Bernanke told the House Oversight Committee in March, balancing the budget abruptly would be even worse.

"It is important to achieve sustainability over a longer period," he told the panel. "One day is a pretty short time frame."

Perhaps even more worrisome than the scheduled "cliff" in federal taxing and spending is the timetable lawmakers face to prevent the worst-case scenarios from playing out. Given the potential changes in party leadership for both Congress and the White House, chances appear slim to none that any decisions will be made until after the November elections. That leaves Congress and the White House roughly eight weeks - punctuated by the Thanksgiving, Christmas and New Year's Eve holidays - to prevent the economy from falling off the cliff both sides have created.

The deadline could be even tougher to meet if, as some are warning, the government runs out of borrowing authority in the middle of that eight-week window.

Though the exact timing is difficult to predict, the next expiration of the current debt ceiling will likely spark another round of brinksmanship reminiscent of last August, when Congress and the White House narrowly quelled a rebellion by House Republicans bent on forcing the U.S. Treasury to default on its debt. That compromise produced the "automatic" $1.2 trillion spending cuts set for early next year. 

"Finding a clever way to kick the can down the road again is becoming a bigger and bigger challenge," Princeton University economist Alan Blinder wrote in a recent Wall Street Journal OpEd. "And Congress has barely coped with previous such challenges."

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The U.S. Federal Reserve on Wednesday repeated its promise to leave interest rates on hold until at least late 2014 but offered few clues into whether it might offer additional stimulus later this year.

The Fed described the economy as expanding moderately, just as it did in March, and said the unemployment rate had declined but remains elevated.

Officials noted a pick up in inflation but said it was largely attributable to energy cost hikes that will affect price growth only temporarily.

Economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," the central bank said in its policy statement.

Richmond Fed President Jeffrey Lacker again dissented against the decision, saying he believed rates would need to be raised before that time frame.

Full text of the Fed's statement here.

As Fed officials gathered on Wednesday, the government reported that orders for long-lasting manufactured goods plunged 4.2 percent in March, the biggest drop since the economy was nose-diving in early 2009.

The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.

Investors wishing for clues about how the central bank views the June end-date of Operation Twist, its latest effort to keep down long-term rates, were disappointed.

U.S. economic growth has been just firm enough to weaken the case for additional stimulus through Fed purchases of government or mortgage bonds. Gross domestic product expanded at a 3 percent annual rate in the fourth quarter but is seen slowing to around a 2.5 percent pace in the first three months of this year.

The Fed will release its latest round of quarterly forecasts at 2 p.m. and Fed Chairman Ben Bernanke will follow with a news conference at 2:15 p.m., where he will likely be peppered with questions on the chances of more easing.

Most analysts think Bernanke will do whatever he can to keep his options open.

Since the central bank's last round of GDP, unemployment and inflation forecasts in January, the U.S. jobless rate has come down to 8.2 percent from 8.5 percent, and the financial situation in Europe has stabilized somewhat, although it is still troubling.

In January, the Fed saw the economy growing between 2.2 percent and 2.7 percent. That range may be revised a bit higher. At the same time, the unemployment rate forecast will likely shift down from January's 8.2 percent to 8.5 percent range.

Policymakers will also offer individual projections for when the first interest rate increase should come and how quickly borrowing costs should rise -- though these will appear on charts that do not link them to specific officials' names.

Traders are currently betting the Fed will begin raising rates in April 2014, with short-term U.S. futures contracts suggesting they see a 56 percent chance of a rate hike then.

In response to the deepest recession in generations, the Fed lowered benchmark overnight rates effectively to zero in December 2008 and more than tripled its balance sheet by purchasing some $2.3 trillion in government and mortgage bonds to keep long-term borrowing costs down.

According to a Reuters poll published last week, economists have dialed down expectations for a third round of bond purchases. The respondents saw a 30 percent chance of more bond buys, down from 33 percent in a poll in March.

A report early this month that showed job growth slowed sharply in March kept some hope of easing alive, and economists will look eagerly to the next round of jobs data on May 4 for more clues on where U.S. monetary policy may be heading.

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Related: Fed struggles to spur slowest recovery in memory

How’s the housing market doing? Investors will get a key reading of the real estate market early Wednesday, and that report could determine the path of stocks for the remainder of the day.

The National Association of Realtors’ existing home sales for February, due at 10 a.m. ET, is a key piece of data used to determine how the economy is faring. The report follows figures on Tuesday showing a slight rise in new housing starts. Some analysts say sales of previously owned homes probably rose to the highest level in almost two years last month.

Investors will also be keeping an eye on Federal Reserve Chairman Ben Bernanke, who is expected to tell lawmakers that Europe must fortify its banks further and that its financial and economic situation is still “difficult,” according to a prepared testimony.

Europe must also act to “increase economic growth and competitiveness and to reduce external imbalances in the troubled countries,” Bernanke will tell the House Committee on Oversight and Government Reform.

Wall Street is currently poised for a higher open, with Dow Jones industrial futures up 0.4 percent at 13,154. S&P 500 futures are also up 0.4 percent, at 1,405.

Reuters contributed to this report.

Republican presidential contender Ron Paul, an avowed opponent of the Federal Reserve System, had a chance to take on his nemesis Ben Bernanke Wednesday, and he made the most of it.

In a hearing of the House Financial Services Committee, Paul, R-Texas, pulled out a one-ounce silver coin to underscore his assertion that precious metals have held their value better than paper money.

In fact, our friends at Business Insider did some research that shows that silver prices have fluctuated widely over the past two decades. "While that ounce of silver has done better than the dollar over time, it's still no ringing endorsement for price stability," Business Insider concludes.

Here is the full exchange between Paul and Fed chief Bernanke:

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Fed chief Ben Bernanke testifies before a House panel Wednesday. He will head to the Senate side Thursday.

Short-term interest rates have been near zero for more than three years and are likely to stay near zero for years to come.

But despite recent signs of modest economic improvement, Federal Reserve chief Ben Bernanke says rates still might be too high. The problem, of course, is that rates can't go any lower.

"It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero," Bernanke said in testimony Wednesday to the House Financial Services Committee.

The below-par economic recovery "suggests that interest rates in some sense should be lower rather than higher. We can't make interest rates lower, of course. (They) only can go down to zero."

Bernanke offered some sympathy to savers who are suffering from bank accounts that return far less than 1 percent, but he said the best way to improve the situation is to restore the economy to full health.

"Remember, people also own equities, they own money-market funds, they own mutual funds, they have 401(k)s and a variety of things, and those assets are assets whose returns depend very much on how strong the economy is," he said. "So in trying to strengthen the economy, we are actually helping savers by making the returns higher as we can see in the stock market, for instance."

The stock market, which has rallied to its highest levels in nearly four years, was off a bit Wednesday, one day after the Dow closed above the psychologically key 13,000 level.

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Related: Bernanke stands by low-rate plan 

WASHINGTON —  Chairman Ben Bernanke told lawmakers Wednesday that the economy has performed better in recent months than the Federal Reserve had expected. If the trend continues, he said the Fed might have to reassess its outlook for a slow recovery.

Investors appeared to take Bernanke's more optimistic tone as a signal that the Fed is less likely to adopt further steps to boost growth. It could also mean that the Fed could back off its plan to hold its key interest rate near zero until late 2014.

Stocks and bond prices both fell. Analysts said Bernanke's speech was notable for what it didn't include: any mention of a new round of government bond-buying.

Speaking at a hearing of the House Financial Services Committee, Bernanke cautioned that the Fed doesn't expect the sharp drops in unemployment to continue this year and it plans to stick with its policy on interest rates.

Still, he said the Fed's late-2014 target for any increase in interest rates is tied to the economy's health and the Fed might have to adjust its target if the economic outlook improves.

"The policy is conditional," Bernanke said in response to a question on the topic. "It is based on what we know now."

A spike in inflation could also force the Fed to reconsider that policy. Gasoline prices are rising again. Bernanke said that will likely push inflation up temporarily while depressing consumers' purchasing power.

Still, he said that the Fed continued to believe that longer-term inflation would remain subdued. He said maintaining a policy that keeps rates low for an extended period "tended to put downward pressure on longer-term interest rates."

Some analysts took Bernanke's remarks to mean the Fed is less likely to buy more Treasury or mortgage bonds to try to drive down long-term rates.

"The possibility of further purchases of mortgage-backed securities by the Fed to help revive housing had been widely discussed in recent weeks," said Kevin Logan, chief U.S. economist at HSBC. "Bernanke made no mention of this possibility or of any type of quantitative easing."

The Fed has held its benchmark interest rate at a record low near zero since December 2008.

Lawmakers and some economists have begun to question whether keeping rates that low for another three years will heighten the risk of inflation, especially if the economy continues to improve and companies keep hiring.

The unemployment rate has fallen for five straight months and employers have added an average of 200,000 net jobs per month from November through January. Many economists are predicting that trend carried over into February.

Consumer confidence rose this month to the highest point in a year, which should lead to more spending and faster growth. Stocks have been surging - the Dow Jones industrial average on Wednesday closed above 13,000 for the first time since May 2008.

Bernanke acknowledged that unemployment, now at 8.3 percent, has fallen faster than the Fed had predicted. He says the Fed doesn't expect the rate to continuing falling as fast this year. But if it does, he says the Fed would reassess its economic outlook.

"In light of somewhat different signals received recently from the labor market than from indicators of final demand and production ... it will be especially important to evaluate incoming information to assess the underlying pace of the economic recovery," Bernanke said.

Click here for the full prepared testimony Bernanke will give to the House Committee on Financial Services.

The Associated Press and Reuters contributed to this report.

Yuri Gripas / Reuters

U.S. Federal Reserve Chairman Ben Bernanke arrives to testify at the House Budget committee hearing on the state of the Economy on Capitol Hill in Washington February 2, 2012.

By Martin Crutsinger, Associated Press

WASHINGTON — Ben Bernanke defended the Federal Reserve's decision to hold interest rates at record-low levels for the next three years, during a contentious hearing before federal lawmakers.

The Fed chief told the House Budget Committee Thursday that the central bank's plan is an appropriate step to combat high unemployment while inflation is stable.

Bernanke was challenged immediately on the issue by the panel's chairman, Paul Ryan, a Wisconsin Republican, who said the Fed's move would risk higher inflation and hurt growth.

"I think this policy runs the great risk of fueling asset bubbles, destabilizing prices and eventually eroding the value of the dollar," Ryan told Bernanke. "The prospect of all three is adding to uncertainty and holding our economy back."

Bernanke disagreed. He said prices have stabilized since spiking in early 2011 and the dollar has shown no signs of weakening.

The Federal Reserve chairman testified one week after the Fed signaled that a full recovery could take at least three more years. As a result, the Fed said it doesn't plan to raise its benchmark interest rate from a record low before late 2014 at the earliest.

The questions from lawmakers covered a range of topics, from Europe's debt crisis to the surging federal deficit.

Bernanke didn't stray far from remarks he made last week after the Fed's policy meeting. He said the economy has shown improvement, but that the pace has been frustratingly slow. He noted that many threats remain, including Europe's debt crisis and the nation's rising debt.

"We still have a long way to go before the labor market can be said to be operating normally," Bernanke told the committee.

Bernanke generally received praise from Democrats, while Republicans were more critical.

One member even accused Bernanke and the Fed of overstepping their authority.

Rep. Scott Garrett, a New Jersey Republican, said the Fed ventured into Congress's territory when it issued a white paper last month exploring proposals to rescue the troubled housing market. He compared the action to lawmakers approving a resolution instructing the Fed on monetary policy — the Fed's use of interest rates to try to boost or slow the economy.

"I was taken aback when the Fed issued an unsolicited white paper on housing policy and it mirrored in many ways the administration's policies on housing," Garrett, scolded Bernanke.

Bernanke apologized if Garrett felt the Fed went too far. He said that the weak housing sector was holding back overall growth and that this was of great concern for the Fed. He said the central bank did not endorse any actions but instead just explored various policy options.

"We were trying to provide pros and cons," Bernanke said.

Still, much of the morning was spent debating the Fed's policies.

Ryan criticized the Fed's decision to establish an annual inflation target of 2 percent. He said Bernanke seemed willing to accept higher inflation in order to get lower unemployment.

Bernanke said the Fed would not waiver in its efforts to maintain low inflation, believing that provided the best framework for full employment.

Rep. Diane Black said the Fed wasn't showing enough concern about the impact low interest rates were having on people who keep their money in conservative investments, such as savings accounts and CDs.

The interest on those investments hasn't kept pace with inflation.

Bernanke said the Fed was trying to get the weak economy moving and that raising interest rates could trigger a recession, which would hurt all investors.

A few questions touched on transcripts released last month that showed the Fed was slow to recognize the severity of the housing crisis in 2006. Bernanke said the Fed had learned a lot of lessons since then.

"While I can never promise that we will not have another financial crisis, I think we have made a lot of progress in how we monitor financial situations," he told the lawmakers.

Bernanke urged lawmakers to balance their desire to cut deficits with policies that could help boost the weak U.S. economy in the short run.

Earlier this week, the Congressional Budget Office estimated that the deficit will top $1 trillion for a fourth straight year and could stay around that level for years.

A key reason the deficit has surged in the past four years is that the government collected less tax revenue. In part, that's because the economy has yet to regain the millions of jobs lost during the Great Recession.

By msnbc.com news services

Spurring stronger growth and more robust job creation in the weak recovery are top priorities for the Federal Reserve, Chairman Ben Bernanke told a military audience at a rare public forum on Thursday.

"For a lot of people, I know, it doesn't feel like the recession ever ended," Bernanke said in remarks prepared for delivery before a town hall-style forum at which he is expected to field questions from 175 military personnel and family members.

Bernanke said the 9 percent jobless rate and record numbers of long-term unemployed Americans are serious problems preoccupying policymakers.

"We at the Federal Reserve have been focusing intently on supporting job creation. Supporting job creation is half of our marching orders, so to speak," he said.

The Fed's other job is to keep inflation in check. Bernanke said inflation should moderate and remain close to the Fed's preferred level of 2 percent or a bit less for the foreseeable future.

Bernanke defended aggressive Fed policies against critics who charge the U.S. central bank has recklessly printed money without regard for the dangers of inflation or a weaker dollar.

"It is important to understand that this type of activity isn't the same as government spending," he said.

The town hall meeting was the latest in a series of public outreach efforts Bernanke has made to underscore the efforts the central bank is pursuing to help ordinary Americans cope with the Great Recession. Over the past 2 1/2 years, Bernanke has attended half a dozen informal gatherings in Kansas City, Atlanta, Cleveland and other cities.

Thursday's town hall meeting was his first in Texas. Fed officials say Bernanke chose the location because he wanted to highlight the base's successful financial literacy program.

Republicans have focused on attacking the Fed's extensive easy money policies, saying the central bank has failed to revive the economy despite cutting interest rates to near zero and buying $2.3 trillion in bonds. Some have warned the Fed against taking actions best left to fiscal policy makers.

Democrats have charged the Fed with implementing policies that benefit Wall Street while disregarding the economic struggles of ordinary Americans. Some argue Fed policymakers should be subject to greater accountability.

The Associated Press and Reuters contributed to this report.

Mario Tama / Getty Images

Fed chief Ben Bernanke said he was "dissatisfied" with the pace of the economy's growth.

With the economy mired in the worst downturn in decades, Fed Chairman Ben Bernanke has been taking heat from all sides.

Even as the Federal Reserve issued a gloomier outlook for job growth and the economy,  Bernanke defended the central banks’ latest decision to sit back, watch for more hopeful signs of growth and hope that its 3-year-old, cheap-money policies will eventually kick start a solid recovery.

“As I've said before, I understand that many people are dissatisfied with the state of the economy,” Bernanke told reporters following a regular two-day meeting of policymakers. “I'm dissatisfied with the state of the economy. Unemployment is far too high.”

In an update of economic projections it issued in June, the Fed lowered its growth outlook for the next three years. Gross domestic product is now seen growing at just 1.6 percent this year (down from 2.8 percent in the June foredcast) and just 2.7 percent next year (down from 3.9 percent).

The expected lower growth prompted the Fed to raise its predictions for the unemployment rate -– to a stubbornly high 8.6 percent by the end of the year, up from a projection of 7.8 percent five months ago. Central bankers now predict that the jobless rate will remain above 7 percent through 2014.

In a 45-minute session with reporters, Bernanke alternated between defending the Fed’s actions since the global financial system collapsed in 2008 and sympathizing with critics who say the Fed hasn’t done enough. But he insisted that Fed policies have made a difference.

“Our best estimates are that, absent the support of monetary policy, that the economy would be in a much deeper ditch and that unemployment would be much higher than it is,” he said

But he conceded that “the pace of progress is likely to be frustratingly slow."

Some of the criticism has come from the left, including the widening Occupy Wall Street protest movement, which faults the Fed for bailing out bankers who made the risky bets that led to the collapse. Those critics, Bernanke said, don’t fully understand the reasons for the Fed’s massive intervention following the financial meltdown.

"A very simplistic interpretation of that was because we wanted to preserve bankers' salaries,” he said. “That obviously wasn't the case. What we were doing was trying to protect the financial system in order to prevent a serious collapse of both the financial system and the American economy."

Bernanke has also been a target of criticism from the right for dumping trillions of dollars of newly created cash into the economy to blunt the impact of a massive credit contraction in 2008. Several Republican presidential candidates have attacked that policy on the grounds that it risks promoting runaway inflation. Those criticisms are also misplaced, Bernanke said.

“We have kept inflation close to 2 percent on average, which both has avoided the problems of high inflation, but also very importantly has avoided the risk of deflation we've seen in other countries," he said. “That deflation can be a very pernicious problem and difficult to get out of once you are there. So we have been able to achieve, on average, stable prices."

In any case, Bernanke said, political opposition to Fed policies would not sway the central bank. Though he acknowledged that the Fed needs to be accountable to Congress, he vowed to continue making policy based economics, not politics.

"Politics is politics, and the Federal Reserve tries to stay nonpartisan,” he said. "Our job is to do the best we can for the U.S. economy, to do what we can to attain our mandate of maximum employment and price stability."

The Fed chairman also noted that the central bank can’t revive economic growth and reduce unemployment by itself, saying “it would be helpful” if Congress and the White House did more to support job growth. He also noted that the Fed has little control over decisions made by European policy who continue to wrestle with a widening debt crisis that threatens to plunge Europe into another recession.

Related:

With few options, Fed turns to 'jawboning'
Word cloud of Fed statement
Fed's latest projections

Click here to watch the full news conference:

The Federal Reserve chairman responds to a question about Occupy Wall Street, saying he understands frustration with the economy. "I am dissatisfied with the state of the economy," Bernanke said. "Unemployment is too high."

Related: Watch the entire press conference.

The Federal Reserve chairman speaks on the health of the economy, saying growth will be "frustratingly slow," and takes reporters' questions. Watch the whole news conference.

Via Reuters.

Related: With few options, Fed turns to 'jawboning'
Fed sees stronger growth, holds off on further actions
Full text of the Fed statement