WASHINGTON - THE US recession is likely to drag on well into 2009 with a 'moderate recovery' in 2010, according to minutes released on Tuesday by the Federal Reserve from last month's deliberations ahead of a historic cut in interest rates.

The minutes from a Dec 15-16 Federal Open Market Committee (FOMC) meeting at which policymakers unanimously cut rates to near zero showed policymakers were faced with a grim economic forecast from its staff.

The report showed economic activity 'appeared likely to decline substantially in the fourth quarter of 2008.'

'The staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010,' the minutes stated.

The data showed an economy suffering on multiple fronts: weak labor conditions, declining consumer and business spending, declining stock market wealth and tight credit.

The housing market, where the economic crisis began, 'was expected to contract further,' the report stated.

'All told, real GDP (gross domestic product) was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year,' according to the minutes.

'Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010.'

The minutes came from a meeting where policymakers lowered the target federal funds rate from 1.0 per cent, already at a historic low, to a range of zero to 0.25 per cent. They also predicted 'exceptionally low' rates to persist 'for some time.'

The FOMC members acknowledged that rate cuts appeared to have run their course and that the central bank 'would need to focus on other tools to impart additional monetary stimulus to the economy in the near term.'

The minutes said 'that communicating the committee's expectation that short-term interest rates were likely to stay exceptionally low for some time could be useful.'

The document said the Fed was likely to remain aggressive with its balance sheet - effectively printing money to buy up troubled assets in an effort to help get credit flowing and spur economic activity.

'It was likely that, during the period of financial turmoil, the size of the Federal Reserve's balance sheet would need to be maintained at a high level,' the minutes said.

US economic activity contracted at a 0.5 per cent pace in the third quarter, according to the latest official data available.

But many economists see a sharp contraction at a pace of up to 6.0 per cent in the fourth quarter and ongoing weakness in 2009.

According to the FOMC minutes, 'In their discussion of the economic situation and outlook, all meeting participants agreed that the economic downturn had intensified over the fall.'

'The information reviewed at the December meeting pointed to a significant contraction in economic activity in the fourth quarter,' the minutes stated.

Still, the majority of members appeared to indicate the contraction would ease sometime in 2009, even if the outlook remained highly uncertain.

'Most (FOMC members) projected that the economy would begin to recover slowly in the second half of 2009, aided by substantial monetary policy easing and by anticipated fiscal stimulus,' the minutes said.

'Meeting participants generally agreed that the uncertainty surrounding the outlook was considerable and that downside risks to even this weak trajectory for economic activity were a serious concern.'

Some of the data suggested 'the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome,' according to the Fed minutes.

In its latest official forecast in November, the Fed acknowledged the possibility of a downturn in 2009 but said GDP activity could be in a range of a 0.2 per cent contraction to growth of 1.1 per cent. -- AFP