The United States Federal Reserve expects the US economy to improve in coming months, even as policymakers downgraded their outlook for all of 2009 and said the unemployment rate could approach 10 per cent.

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 US 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 April-June quarter, according to documents released Wednesday.

But even with the hoped-for improvements, the economy's performance for this year as a whole is expected to be dismal, partly reflecting the 6.1 per cent annualised drop in economic activity in the first quarter.

Under the Fed's new projections, the economy will shrink this year between 1.3 per cent and 2.0 per cent. The old forecast said the economy could contract between 0.5 per cent and 1.3 per cent.

The unemployment rate may rise as high as 9.6 per cent, higher than the old forecast of 8.8 per cent.

The jobless rate bolted to 8.9 per cent 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 per cent this year.

-AP