Washington  - The embattled US financial system is making strides on the way to recovery from the worst recession in decades, US President Barack Obama and Treasury Secretary Timothy Geithner said Wednesday.

The world's largest economy was showing "some return to normalcy in certain aspects of the financial markets," Obama said at the first full meeting with his new board of outside economic advisers.

"We're pleased that we've seen some progress."

Hours later, though, recent comments by US Federal Reserve officials gave gloomy outlooks for the fourth quarter that were even worse than the central bank had projected in January.

In written minutes released late Wednesday from the April 28-29 meeting, members of the Federal Open Market Committee said they anticipated a fourth-quarter contraction in the US gross domestic product (GDP) of 1.3 to 2 per cent, a sharp change from the 0.5 to 1.3 per cent negative growth it had projected in January for the October-December period.

The committee expected unemployment to reach 9.2 to 9.6 per cent during the fourth quarter of 2009, compared to the Fed's initial projections of 8.5 to 8.8 per cent.

Current US unemployment is 8.9 per cent, the highest since 1983.

Obama warned Wednesday that unemployment may stay high "for some time." Fed officials also expected that a 9-per-cent unemployment rate would last through to the end of 2010 and could remain as high as 8.5 per cent through 2011.

The Fed committee, which includes 17 officials such as Fed governors and district branch presidents, makes economic projections four times a year. The weaker forecasts are in line with changes to projections by private economists over the last few months, the Bloomberg financial news service reported.

Economic growth projections for 2010 remained relatively stable. Fed officials projected growth of 2 to 3 per cent in 2010, only slightly down from from the 2.5 to 3.3 per cent they forecast in January.

Participants generally expected that strains in credit markets and in the banking system would ebb slowly, and hence the pace of recovery would continue to be damped in 2010," the Fed said in the minutes.

Economic growth will pick up in 2011 as financial conditions improve, the Fed said.

Treasury Secretary Geithner earlier Wednesday told the Senate banking committee that there were "important indications" that the financial system "is starting to heal."

Geithner reassured Congress that there has been a "substantial amount of adjustment" under the drastic interventions in the financial sector using US government money.

"The most vulnerable parts of the non-bank financial system no longer pose the same risk," he said. "(Banks) are funding themselves more conservatively."

The risk premiums for inter-bank loans as well as municipal bonds have fallen, and the issuance of new securities "has started to revive," Geithner said.

He cautioned: "The process of financial recovery and repair will take time."

Geithner was optimistic that by July, a government programme to help banks get rid of their distressed assets would be up and running.

The programme will use about 75 billion to 100 billion dollars of government money, which remains from the 700-billion-dollar emergency relief adopted in October by the US Congress. With participation from the private sector, purchasing power could be boosted to 500 billion to 1 trillion dollars, Geithner said.

The distressed assets include in large part mortgages gone sour amid a real estate market that was overheated by risky securitization of home loans. (dpa)