Fed Sees Hopeful Signs, but Cuts Outlook

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% annualized drop in economic activity in the first quarter.

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

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

The predictions are based on what the Fed calls its "central tendency," which exclude 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% 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.

The Fed at its meeting in March launched a bold $1.2 trillion economic-revival effort. It agreed to start buying up to $300 billion worth of government debt over the next six months and to boost purchases of mortgage securities and debt from Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote).