Fed sees hopeful signs but downgrades ’09 forecast

The economy could begin to pull out of the recession later this year, but a full recovery could take as long as six years, says a forecast issued Wednesday by the Federal Reserve.

The projections were grimmer than those the Fed had issued in January. Yet they still reflected a growing sentiment that the economy has turned a corner and is declining at a more moderate pace than in the fall.

Fed officials predicted that the economy would shrink this year and then expand at an annualized rate of 2% to 3% in 2010, before gaining further momentum in 2011. However, they expected labor market conditions to be weak for some time. They projected unemployment to rise to 9.2% to 9.6% and stay in that range through the end of next year before leveling off at 7.7% to 8.5% in 2011. As of April, the jobless rate was 8.9%.

The forecast was included in minutes of the April meeting of the Fed’s policymaking arm, the Federal Open Market Committee. Having already slashed rates close to zero, Fed officials spent the two-day meeting assessing the effectiveness of their earlier decision to buy up mortgage-backed securities, long-term Treasury bills and debt issued by mortgage giants Fannie Mae and Freddie Mac.

They concluded that the purchases had had the intended effect of helping revive the economy and said they were prepared to buy more long-term Treasuries to “spur a more rapid pace of recovery.”

The Fed’s unconventional strategy has stirred fears that the central bank will not be able to withdraw the unprecedented amount of money it has injected into the economy quickly enough to prevent a steep rise in inflation.

Officials said, however, that they expected inflation to stay well within the Fed’s unofficial target of 2% for years to come because of the weak recovery.