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 President Barack Obama's stimulus package and the Fed's aggressive efforts to lift the country out of recession take hold.

WASHINGTON — The Federal Reserve expects the economy to improve in coming months, even as policymakers downgraded their outlook for all of 2009 and said the unemployment rate could approach 10 percent.

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 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 today.

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 percent 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 percent. The old forecast said the economy could contract between 0.5 and 1.3 percent.

The unemployment rate may rise as high as 9.6 percent, higher than the old forecast of 8.8 percent. The jobless rate bolted to 8.9 percent 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 percent this year.