THE Federal Reserve is expected to keep US interest steady when it meets tomorrow and Wednesday, but a growing number of pundits on both sides of the Atlantic believe the US central bank will push up the cost of borrowing before the year's end as economic growth gathers pace.

French-based Societé Générale is the latest investment bank to predict that policymakers in Washington will soon bump up the Federal Funds rate by a quarter-point to 5.5% from the present 5.25%.

Most Wall Streeters have ruled out any chance of a rate cut this week, despite a persistent slump in the US housing market.

Data on the housing sector released a few days ago presented some grim news for economists. US home starts fell for the first time in four months in May as interest rates on mortgages rose, suggesting the worst housing recession in 16 years will persist.

Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1% from the prior month, the Commerce Department said. However, building permits increased 3% to 1.501 million.

The slump, which has lasted almost two years, is restraining economic growth even as inflation is too high for the comfort of Federal Reserve officials.

It had appeared that depressed conditions in the housing market were hitting the bottom at the end of last year, but there has been a renewed drop in recent months sparked by problems in the mortgage industry.

The level of late payments and foreclosures on subprime mortgages hit record highs in the first three months of the year, according to a survey by the Mortgage Bankers' Association.

Lenders provide subprime mortgages to less well-off clients or risky borrowers.

Meanwhile, the average rate on a 30-year fixed mortgage has jumped to the highest in more than a year, putting pressure on first-time buyers and raising the prospect of additional defaults.

On Friday, US equity markets tumbled when the 10-year Treasury note yield jumped to 5.21% from 5.2% on Thursday, reigniting worries among stock investors about high rates thwarting corporate deal-making and the further injuring the limping housing market.

The Dow Jones industrial average closed Friday's session down 185.58 points, or 1.37%, at 13,360.26.

Record levels of unsold homes suggest the slump is far from over. Fed policymakers now acknowledge the housing recession may linger longer than previously forecast.

"The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," Fed chairman Ben Bernanke said in a speech in June that set the tone for this week's rate-setting deliberations.

Kevin Logan, senior market economist at Dresdner Kleinwort in New York, agreed with the Fed chief, saying: "The housing contraction is going to be a drag for the rest of the year."

Other analysts said the downturn in the housing market has been a serious concern, creating fears that it could have a knock-on effect on other sectors of the economy.

Bill Gross, manager of Pacific Investment Management - the world's largest bond fund - said the US housing industry is in such a perilous shape that the Federal Reserve may need to cut interest rates in six to nine months.

"We're having a housing bust," Gross said in a June 11 interview with US financial journalists in New York.

The Fed chairman has played down fears that the US housing market may crash and inflict damage on other parts of the economy.

"We have not seen major spillovers from housing on to other sectors of the economy," said Bernanke in his early June speech.

The world's most powerful central banker went on to say the US economy will rebound, even as housing sales continue to tumble. He reiterated the Fed's view that the economy will expand "at a moderate pace".

The upbeat view echoes May data showing con- sumers were unexpectedly optimistic.

Economists said Bernanke's comments mean that the Fed is not planning to cut interest rates.

This view was reinforced by findings in the most recent Fed Beige Book. It indicated prospects for overall economic growth were improving. Factory production was up in a majority of districts, an improvement from the previous survey that found manufacturing was slow in most Fed districts.

Consumer spending and retail sales across the US generally were up too.

A separate report from the Commerce Department showed sales at retailers in May posted their biggest gain in 16 months.

This week's Fed meeting takes place in a climate of rising interest rates across the globe. The Bank of England has pushed up base rates four times since August and may do again before the summer ends to stifle inflationary pressures in the UK.

The European Central Bank also raised the cost of credit at its latest meeting in early June.

The Bank of Japan has indicated it may soon move away from near-zero interest rates, while the Reserve Bank of Australia is likely to increase borrowing costs after the forthcoming general election down under.