Federal Reserve expects improvement

WASHINGTON (AP) — The Federal Reserve expects the economy to improve in coming months, even as policymakers downgraded their outlook for all of 2009 and said the unemployment rate could approach 10 percent.

Fed Chairman Ben Bernanke and his colleagues continue to believe that business sales and factory production will begin to recover gradually during the second half of this year as President Barack Obama’s stimulus package and the Fed’s aggressive efforts to lift the country out of recession take hold. They also pointed to signs that the recession’s grip was easing in the current quarter, according to documents released Wednesday.

At the Fed’s last meeting April 28-29, policymakers opted not to take any new steps to shore up the economy after launching a $1.2 trillion effort in March. But some members last month said those plans for buying government debt and mortgage securities may need to be expanded to speed a recovery.

“Participants noted some improvement in financial conditions in recent months, signs that consumer spending was leveling out and tentative indications that activity in the housing sector might be nearing its bottom,” the documents said.

That’s consistent with observations made earlier this month by Bernanke, who gave his most optimistic prediction about the end of the recession, saying he expected the economy to begin growing again later this year.

In fact, the Fed’s staff bumped up its forecast for economic growth for the second half of this year, although a figure wasn’t provided.

Even with those positive signals, the economy’s performance for this year as a whole is expected to be dismal, partly reflecting the 6.1 percent annualized drop in economic activity in the first quarter.

Under the Fed’s new projections, the economy will shrink this year between 1.3 percent and 2 percent. The old forecast said the economy could contract between 0.5 percent and 1.3 percent.

The unemployment rate may rise as high as 9.6 percent, higher than the old forecast of 8.8 percent. The jobless rate bolted to 8.9 percent in April, the highest in a quarter-century.

The predictions are based on what the Fed calls its “central tendency,” which excludes the three highest and three lowest forecasts made by Fed officials. The Fed also gives a range of all the forecasts that showed some officials expect the jobless rate to hit 10 percent this year.

To revive the economy, the Fed has cut its key interest rate to a record low near zero and is expected to hold it there well into next year. The Fed also has turned to unconventional tools to lower interest rates and spur spending, which would help bolster economic activity.

All members agreed with “waiting to see how the economy and financial conditions respond to the policy actions already in train,” according to separate minutes of the April meeting. However, they held the door open to additional action if needed.