Fed downgrades economic forecast; Bernanke vows to do 'everything possible'

WASHINGTON -- The Federal Reserve offered little positive news on the economy Wednesday as a report showed policymakers' outlook for 2009 and 2010 darkened considerably in the past few months, while Chairman Ben Bernanke said recent data have been "dismal."

The Fed officials lowered their estimates for gross domestic product — the broadest measure of U.S. economic activity — to forecast the first annual contraction in the economy since 1991 this year.

At the same time, the Fed policymakers raised their quarterly forecasts for the unemployment rate this year and next by a percentage point or greater at their meeting in January from those made in October. Everyone said they expected the unemployment rate would remain elevated through at least the end of 2011, "even absent further economic shocks," the minutes of the meeting said.

While the economy was forecast to improve in the second half of the year, the recovery was expected to be "unusually gradual and prolonged," the minutes said.

Fed officials projected low inflation for at least the next few years, a view repeated by Bernanke at a National Press Club luncheon. The Fed chief said the U.S. central bank was determined to do "everything possible within the limits of its authority" to repair the battered economy.

"Extraordinary times call for extraordinary measures," Bernanke said, defending recent Fed actions to bail out troubled institutions such as insurance giant American International Group and to create extraordinary lending programs to backstop troubled lending markets.

In a rare public meeting with reporters, Bernanke fielded a number of questions, from the downfall of Lehman Bros. to the potential nationalization of banks. The Fed is seeking to boost its transparency in light of concerns about its increasing involvement in the economy and to maintain confidence in the central bank. Wednesday, policymakers issued projections for where they think GDP, unemployment and inflation will settle in the longer term. Inflation was seen around 2% under the Fed's watch.