Federal Reserve downgrades U.S. economic outlook

The U.S. Federal Reserve cut its outlook for the performance of the battered U.S. economy on Wednesday, saying it now expects a contraction of between 0.5 and 1.3 per cent this year.

Back in mid-November, the Fed projected that 2009 could see anything from a contraction of 0.2 per cent up to expansion of 1.1 per cent.

"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to the Fed's new economic outlook.

The U.S. central bank also offered a bleaker picture for the employment situation. It said the jobless rate in the U.S. is now expected to reach between 8.5 and 8.8 per cent this year. That is up from the previous forecast of between 7.1 and 7.6 per cent.

The U.S. unemployment rate currently sits at 7.6 per cent. In January alone, employers cut their payrolls by roughly 598,000 workers. The U.S. economy, which has been in recession since December 2007, has lost roughly 3.6 million jobs since then.

The Fed said it sees unemployment remaining higher than normal through 2011, even without the possibility of more shocks to the economy.

Faced with the worst economic situation since the 1930s, U.S. President Barack Obama on Tuesday signed a $787-billion US economic stimulus bill that he said will preserve or create roughly 3.5 million jobs.