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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Stocks opened slightly higher on Wall Street Wednesday as investors digested the Federal Reserve's somewhat upbeat outlook on the economy that helped push stocks to multi-year highs on Tuesday. It was stocks' strongest session so far this year.

Shortly after the opening bell, The Dow Jones Industrial Average, which closed well above 13,000 Tuesday, was up 0.17 percent. The broader Standard and Poor's 500 gained 0.05 percent and the Nasdaq rose 0.17 percent.

The Fed said Tuesday that most of the largest U.S. banks passed their annual stress test in a report that underscored the recovery of the financial sector but called out a few laggards, including Citigroup Inc.

Banks have been a leading component of the 11 percent rally in the S&P for the year, with the KBW Bank index up more than 20 percent and the S&P financial sector index up more than 18 percent.

Late in Tuesday's session, the Fed also said it expects "moderate" growth over coming quarters with the unemployment rate declining gradually versus the "modest" growth the central bank said it expected in January.

In other bank-related news, Greg Smith, a Goldman Sachs executive director, said he will quit the bank, calling the current environment at the firm 'toxic.'

The increasing optimism on the U.S. economy helped boost the dollar, which hit an 11-month high against the yen and 1-month high versus the euro.

Swiss drugmaker Roche Holding AG said it received a request for additional information from the Federal Trade Commission related to its $5.7 billion hostile bid for U.S. gene decoder Illumina Inc.

European shares rose to reach fresh 33-week highs, led by financials as Fed improved its economic outlook for the world's largest economy and said most U.S. banks had passed its stress tests.

Asian shares advanced as upbeat U.S. economic data plus signs of improving capital positions at big American banks stoked appetites for risk.

Reuters contributed to this report.

NEW YORK -- Stocks rallied on Tuesday, with banks and technology shares leading the way higher as stronger-than-expected retail sales and signs of easing in the euro zone were signals the global economy was gaining momentum.

The Federal Reserve said that recent strains on financial markets were easing, and the economy was "expanding moderately," though growth still faced significant downside risks. The assessment of the economy's expansion was unchanged from the Fed's January statement.

Recently, Wall Street was unnerved after Fed Chairman Ben Bernanke stopped short of giving a strong signal of more economic stimulus during congressional testimony.

Data in the United States once again indicated a slowly improving domestic economy, as retail sales recorded their largest gain in five months in February despite rising gasoline prices.

"Spending is picking up, with consumers showing a willingness and ability to spend, which suggests that retail stocks will really be coming into the market," said David Joy, chief market strategist at Ameriprise Financial in Boston.

Joy, who helps oversee $571 billion in assets under management, added that the Fed was being "overly bearish."

At the closing bell, the Dow Jones industrial average was up 219.10 points, or 1.69 percent, to 13,178.81. The Standard & Poor's 500 Index was up 24.92 points, or 1.82 percent, to 1,396.01. The Nasdaq Composite Index was up 53.12 points, or 1.78 percent, to 3,036.78.

Underscoring the upbeat sentiment, the CBOE Volatility Index or VIX, hovered near levels not seen since mid-2007. Its 14-day moving average is at its lowest since last June.

Euro-zone finance ministers gave final approval to a second bailout for Greece, and a German index of analysts' and investors' sentiment rose much more than expected in March.

The European Union, the United States and Japan formally asked the World Trade Organization to settle a dispute with China over restrictions on exports of raw materials, including rare earth elements critical to electronics makers.

Beijing said the export curbs were motivated by environmental concerns, adding that it would defend itself.

Shares of Molycorp , a rare earth oxide producer that owns a rare earth project outside of China, shot up 3.8 percent to $31.02. The company's stock has seen daily moves of at least 4 percent more than a dozen times this year.

Despite the upbeat retail data, shares of Urban Outfitters Inc dropped 5.9 percent to $27.76 a day after it said it expects margins to continue to be pressured.

Reuters contributed to this report. 

Stocks moved higher on Wall Street Tuesday after the Federal Reserve offered a modestly upbeat view of the economy and said interest rates would remain at exceptionally low levels for some time to come.

Investors welcomed the Fed's assessment, which said the economy was expanding modestly, the job picture was improving, households continued to spend and businesses were inveting. It offered little hints regarding any further monetary easing.

At midafternoon, the Dow was 13,061.96, up 0.79 percent. The broader Standard & Poor's 500 gained 0.82 percent and the Nasdaq rose 1.01 percent. If the Nasdaq maintains its gains, it will close above 3,000 for the first time since Dec. 11, 2000.

Meanwhile, eurozone finance ministers gave final approval to a second bailout for Greece, and a German index of analysts' and investors' sentiment rose much more than expected in March.

Data in the United States once again indicated a slowly improving domestic economy, as retail sales recorded their largest gain in five months in February despite rising gasoline prices.

"Europe has improved from a crisis situation to a chronic condition," said Stephen Wood, chief market strategist at Russell Investments in New York. "The data in America continues to grind upward, and investors can more effectively assess risk."

Underscoring the upbeat sentiment, the CBOE Volatility Index or VIX fell to levels not seen since mid-2007. Its 14-day moving average is at its lowest since last June.

Analysts say the lack of volatility has helped dry up volume, as high-frequency traders see fewer opportunities for quick gains. But others worry that low volume points to a lack of commitment to the market that can make it vulnerable.

Monday's volume of 5.24 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq represented the lowest tally of the year and was 33 percent below last year's daily average during March.

Reuters contributed to this report.

Federal Reserve Chairman Ben Bernanke and his central banking colleagues left interest rates unchanged at historic lows Tuesday and said they see the economy growing modestly with the jobs picture improving.

"Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated," the Fed's Open Market Committee said in a statement after its regular meeting to discuss economic conditions.

The Fed also said it sees continued advances in household spending and investment by businesses. Despite the upbeat tone, the Fed gave no hints of any change in monetary policy and reiterated it would keep rates low until at least through late 2014.

It warned that global financial markets still posed considerable risks for the economy. "Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook," the Fed statement said.

The Fed said a recent spike in energy costs would likely push up inflation but only in the short run. Richmond Fed President Jeffrey Lacker again dissented from the decision. The statement said Lacker does not see the need for exceptionally low rates through 2014.

A report on Tuesday showed retail sales posted their largest gain in five months in February, the latest data to suggest the economic recovery is on a more solid footing.

Even so, Fed officials are uncertain whether the progress reducing unemployment can be maintained given still-sluggish economic growth, and many analysts believe the central bank will launch another round of bond buying later in the year.

In a poll Friday of firms that trade directly with the Fed, 14 of 18 economists anticipated further "quantitative easing," the Fed's latest mechanism to get more cash into the economy. That survey was taken after the government said the economy created more than 200,000 jobs for the third month running in February.

The Fed cut overnight interest rates to near zero in December 2008 and has bought $2.3 trillion in bonds to boost growth. It repeated Tuesday that it was likely to hold rates at rock-bottom levels at least through late 2014 and that it would continue to rebalance its portfolio to pull down longer-term interest rates, a program that ends in June.

Analysts are looking to the Fed's two-day meetings in April and June for decisions about any new directions for policy. After both meeting, Bernanke will hold a news conference and officials will make public updated economic and interest rate projections.

Most economists think the economy will expand at a modest rate of about 2 percent in the current quarter. Bernanke said in January it would normally take a growth pace of between 2 and 2.5 percent just to hold the jobless rate steady.

While the economic recovery is nearly three years old, officials lament that the United States is still far from full employment. Although the jobless rate has fallen significantly over the last six months, it remains stubbornly high at 8.3 percent officially.

The Fed has downplayed any worries about inflation in recent months, saying it expects sluggish growth to hold price pressures in check. Officials said they expect inflation to run at or below the central bank's 2 percent target in coming quarters.

However, oil prices have been climbing in reaction to tensions over Iran's nuclear program. U.S. gasoline prices jumped in January, and even core consumer prices, which strip out volatile food and energy costs, rose by 2.3 percent over 12 months, the fastest pace in more than two years.

Rising concerns about inflation would weaken any argument at the Fed in favor of easing financial conditions further.

Reuters contributed to this report.

The S&P 500 and Nasdaq hit multi-year highs on Tuesday as U.S. retail sales rose more than forecast last month and as concerns eased about the euro zone's crisis.

Euro-zone finance ministers gave final approval to a second bailout for Greece, and data in Germany showed analyst and investor sentiment rose significantly more than expected in March.

Data in the United States once again indicated a slowly improving domestic economy, as retail sales recorded their largest gain in five months in February despite rising gasoline prices.

"Europe has improved from a crisis situation to a chronic condition," said Stephen Wood, chief market strategist at Russell Investments in New York. "The data in America continues to grind upward, and investors can more effectively assess risk."

Underscoring the upbeat sentiment, the CBOE volatility index fell to levels not seen since mid-2007. Its 14-day average is at its lowest since last June.

Analysts say the lack of volatility has helped dry up volume, as high-frequency traders see less opportunities for quick gains. But others worry the low volumes point to a lack of commitment to the market that can make it vulnerable.

Monday's volume of 5.24 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq represented the lowest tally of the year and was 33 percent below last year's daily average during March.

The Dow Jones industrial average rose 88.32 points, or 0.68 percent, to 13,048.03. The S&P 500 Index gained 9.61 points, or 0.70 percent, to 1,380.70. The Nasdaq Composite added 23.11 points, or 0.77 percent, to 3,006.77.

The S&P 500 index reached its highest intraday level since June 2008, and the Nasdaq Composite hit its highest mark since December 2000.

Later in the session, investors will look to the U.S. Federal Reserve, which is expected to hold steady on monetary policy when it concludes its one-day meeting, acknowledging a mildly brighter economic outlook while refraining from any suggestion that further easing is now off the table.

Fed officials also are expected to nod to the labor market's stronger pulse in a statement due at about 2:15 p.m. (1815 GMT).

To the extent the market is expecting more quantitative easing form the Fed, "there will be disappointment," said Wood. "If they are expecting a continuation of policy with no radical changes, they'll be happy."

Markets were unnerved recently after Fed Chairman Ben Bernanke stopped short of giving a strong signal of more economic stimulus during Congressional testimony.

The Federal Reserve's Open Market Committee is meeting in Washington Tuesday and everyone is expecting, well, not much of a change. 

With the recovery plodding along and inflation only a minor worry (those gas prices!) the Fed is unlikely to change course on interest rates. It's outlook for the economy will remain somewhat upbeat, with caveats, of course, so stocks are trending higher ahead of the opening bell.

Aside from the Fed, which will announce its decision in midafternoon, investors will be watching retail sales data from February. Reuters says a survey of economists expects a 1.0 percent rise versus a 0.4 percent gain in January. Back out auto sales, and the number will likely be a 0.7 percent rise, same as January.  

Stay the course. That's the message economists expect the Federal Reserve to deliver at the Federal Open Market Committee meeting Tuesday. 

"Steady as she goes," said Lawrence J. White, professor of economics at New York University's Stern School of Business. "It's not a time to be doing any major new initiatives but not yet a time to be tightening up."

The Fed is likely to reiterate observations made by chairman Ben Bernanke when he addressed Congress in January: Employment is recovering faster than anticipated, but the housing market is still in the dumps, and it's not clear that demand has recovered enough to propel continued expansion of the jobs market. "The fundamentals that support spending continue to be weak," he said.

There's also the wild card of oil prices, Mitchell O. Goldberg, president of ClientFirst Strategy Inc., points out. The mild winter experienced by wide swaths of the country combined with the low price of natural gas gave Americans a break on their heating bills. If the price of oil continues to rise, however, it could act as a brake on the recovery's momentum and cancel out better-than-expected employment numbers.

Europe's economic trouble could also throw a wrench into the recovery's momentum. "The risk of economic turmoil in Europe remains despite the current agreement on Greek debt," Joerg Dittmer, senior analyst at Frost & Sullivan, said via email. "Economic difficulties in Europe would impact the United States through reduced demand for our exports."

Above all, the Fed wants to avoid excessive optimism; it applauded the appearance of so-called green shoots in the past, only to watch the economy falter in subsequent months. 

People looking for movement on interest rates are likely to be disappointed. The Fed isn't expected to budge from its commitment to keep rates at historic lows through 2014. Inflation isn't a problem. If the economy were to bounce back suddenly, "There are other tools that the Fed can use besides raising their target rate to tamp down inflation," Goldberg said.

"They could raise bank reserve requirements. They could push lending standards to be more stringent. They could let maturing assets on their balance sheet mature without being replaced," he said. 

White said the Fed will probably let its "Operation Twist" wind down later this year as planned, and is unlikely to announce any further actions to increase the money supply. 

The Fed's other big announcement this week will be the results of its most recent round of bank stress tests. "Overall, every indication is that it will show a stronger industry than three years ago," said banking consultant Bert Ely. "That's what we'd expect because there's been lot of capital building and cleaning up of problems on bank balance sheets."

Now that the industry as a whole recovering, though, it will put more of a spotlight on banks that are still struggling. 

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.