Oct. 12 (Bloomberg) -- The Federal Reserve will increase its Treasury purchases at a policy meeting next month, helping the U.S. avoid the "very bad" economic outcome of a renewed recession, Goldman Sachs Group Inc. said.

A loss of 95,000 jobs in September reported by the Labor Department Oct. 8 will lead the Fed to act, New York-based Jan Hatzius, chief U.S. economist at Goldman Sachs, said in an e- mailed note. Policy makers will announce roughly $500 billion of Treasury purchases through about the middle of 2011 and indicate they are ready to buy more, according to Goldman, one of the 18 primary dealers that trade directly with the Fed.

U.S. two-year yields extended declines to record lows today as traders bet the Fed will buy more Treasuries as it tries to keep borrowing costs down. The economy will expand less than previously estimated, a survey showed, underscoring the need for Fed action. It purchased $300 billion of Treasuries in 2009 under a policy known as quantitative easing, or QE. Traders preparing for another round of buying have dubbed it QE2.

"QE2 and its impact on financial conditions is one key reason why we expect the economy over the next six-nine months to be only ¿fairly bad' rather than ¿very bad,'" Hatzius wrote in his note. "Friday's jobs numbers put the seal on a quantitative easing announcement at the Nov. 2-3 FOMC meeting."

The Fed may need to hold interest rates at current levels until 2015 or later, he wrote. Policy makers cut the target for overnight lending between banks to a range of zero to 0.25 percent in December 2008.

A "fairly bad" economy will be defined by gross domestic product growth of 1 percent to 2 percent, a gradual increase in unemployment and disinflation, according to Hatzius. A "very bad" outcome will be a renewed recession, he wrote.

The two-year note yielded 0.34 percent as of 10:20 a.m. in Tokyo, according to BGCantor Market Data. The rate dropped to a record low of 0.335 percent earlier today. The 0.375 percent security due in September 2012 traded at a price of 100 2/32.

The central bank is scheduled today to release minutes of its Sept. 21 meeting, when the Federal Open Market Committee said it was willing to ease monetary policy further.

Gross domestic product will increase 2.6 percent this year and next, according to the median of 46 economists surveyed by the National Association for Business Economics from Sept. 2 to Sept. 21. A May poll projected growth of 3.2 percent for both years. Economists also cut estimates for personal spending, employment and consumer prices.

"If we get through the next six-nine months, the growth pace is likely to pick up in the remainder of 2011," Hatzius wrote. "The pattern should look more encouraging than in 2010."