RTTNews - With recent data indicating that the decline in economic activity could end before long, the Federal Reserve now expects a less severe contraction in 2009 and a moderately stronger recovery in 2010.

The minutes of the June meeting of the Federal Open Market Committee released on Wednesday showed that the Fed's GDP estimates were revised to show a smaller than expected decrease in 2009 and a bigger than expected increase in 2010.

At the same time, the Fed said it expects the unemployment rate to come in higher than previously estimated based on the incoming employment data.

The Fed said it now expects GDP to contract by 1.0 to 1.5 percent in 2009 compared to the previous estimate for a 1.3 to 2.0 percent decline.

Additionally, GDP in 2010 is now expected to increase by 2.1 to 3.3 percent, an upward revision from the previous estimate of 2.0 to 3.0 percent growth.

Meanwhile, the estimates for the unemployment rate in 2009 were revised to up to 9.8 to 10.1 percent from the previous estimate of 9.2 to 9.6 percent. The unemployment rate in 2010 is now expected at 9.5 to 9.8 percent compared to the previous estimate of 9.0 to 9.5 percent.

The Fed added that FOMC participants foresaw only a gradual improvement in labor market conditions in 2010 and 2011, leaving the unemployment rate at the end of 2011 well above the level they viewed as its longer-run sustainable rate.

Nonetheless, the Fed said, Looking ahead to 2011 and 2012, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored.

Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core personal consumption expenditures inflation would stay low, the central bank added.

The minutes also showed that the FOMC members agreed that the target for the federal funds rate should remain at 0.0 to 0.25 percent, given the prospects for weak economic activity, substantial resource slack, and subdued inflation.

While the Fed said the outlook for rates would depend on evolving economic expectations, the members agreed that it was most likely that the federal funds rate would need to be maintained at an exceptionally low level for an extended period.

The FOMC also agreed that changes to its program of asset purchases were not warranted at this time. While an expansion of such purchases might provide additional support to the economy, the committee noted that the effects of further asset purchases were uncertain.

In March, the Fed decided to increase the size of its by purchasing up to an additional $750 billion of agency mortgage-backed securities.

The Fed also said it would increase its purchases of agency debt this year by up to $100 billion and purchase up to $300 billion of longer-term Treasury securities.

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