The Federal Reserve said on Wednesday that it saw modest improvements in the U.S. economy last month, but considered increasing purchases of mortgage-related and government debt to spur recovery.

A pickup in household and business confidence was helping to steady spending, Fed officials believed when they met in late April, but they viewed the evidence as too tentative to erase big downside risks facing the recession-mired economy.

They also cut their forecasts for economic growth over the next three years and debated whether they should further ramp up planned purchases of mortgage agency and government securities, minutes of their April 28-29 policy meeting said.

Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery, the minutes said.

All members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases, the Fed said.

In fresh quarterly forecasts, the Fed projected the U.S. economy would contract by between 1.3 percent and 2.0 percent this year, with the unemployment rate rising to between 9.2 percent and 9.6 percent.

In January, the Fed forecast a milder contraction of between 0.5 percent and 1.3 percent, with the jobless rate rising to between 8.5 percent and 8.8 percent.

U.S. stocks pared gains on the gloomier economic forecast and bond prices rallied on the prospect the Fed would boost its securities purchases.

I think what initially sent (stocks) down was they talked about downgrading the economic forecast ... (But) they talked about economic stability, housing beginning to stabilize, and while the near-term outlook is uncertain, the long-term outlook remains favorable, said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.

At its April meeting, the Fed held its target for its benchmark federal funds interest rate unchanged at close to zero, the level reached in December, and took no other actions to boost the amount of money in the economy.

A month earlier, it had shocked financial markets by expanding purchases of mortgage agency securities and debt by $850 billion and pledging to buy $300 billion of longer-term Treasury securities over the next six months.

The minutes said that while inflation looked to remain subdued, many officials at the meeting felt the danger the U.S. would suffer a Japan-style deflation of widespread and lasting price declines had diminished.

(Reporting by Mark Felsenthal and Alister Bull; Editing by Andrea Ricci)

New York Inflation