What the Fed is considering at its Aug meeting

By Tamawa Kadoya

NEW YORK (Reuters) - Wall Street widely expects the U.S. Federal Reserve to keep short-term benchmark interest rates unchanged on Tuesday as the central bank grapples with a faltering economy, shaky financial system and higher prices.

While the federal funds rate will likely stay at 2 percent, more than one voting member of the rate-setting Federal Open Market Committee policy-makers may dissent and call for higher rates.

The Fed held rates steady when the panel last met in June. It last eased in April, bringing the fed funds rate down by a cumulative 3.25 percentage points from mid-September last year.

A Reuters poll on Friday showed most primary dealers expected the Fed to hold rates steady through the end of the year, with the next move likely to be a rate increase sometime next year.

Following are some factors policy-makers are considering:

ECONOMY

The U.S. unemployment rate rose to 5.7 percent in July, its highest in more than four years, as employers cut payrolls by 51,000 nonfarm jobs, the seventh straight month of declines.

The U.S. economy grew 1.9 percent in the second quarter, as consumer spending was bolstered by the government's tax rebate checks. Gross domestic product for the final quarter of 2007 was revised to show contraction of 0.2 percent.

U.S. manufacturing was flat in July, with the Institute for Supply Management index of national factory activity at 50.0 from 50.2 in June, above economists' median forecast of 49.3.

Durable goods orders, excluding volatile transportation orders, were up 2 percent in June, the sharpest rise since December.

The Reuters/University of Michigan Surveys of Consumer's July final consumer sentiment index rose to 61.2 from June's final reading of 56.4. One-year inflation expectations stood unchanged at 5.1 percent in July while 5-year inflation was at 3.2 percent versus 3.4.

FINANCIAL INSTITUTIONS/CENTRAL BANK STEPS

Concerns about the U.S. financial system flared again in July. The government formed a bailout plan for U.S. mortgage finance companies Fannie Mae and Freddie Mac, with the Treasury extending credit to the firms if needed and the Fed allowing the firms to borrow directly from the central bank after they had tapped funding from the Treasury.

Banks' financial woes were highlighted by another wave of write-downs. Merrill Lynch reported a $5.7 billion write-down and sold $8.5 billion in stock.

U.S. commercial banks' primary credit borrowings rose to a record $16.38 billion per day in the week ended July 23.