The Federal Reserve will almost certainly keep its key interest rate steady at 2% when its policymakers meet tomorrow, despite a recent rise in unemployment, a weak banking sector, falling wages and a protracted housing slump that shows little sign of abating.

In the terse statement that accompanies interest rate decisions, Fed chairman Ben Bernanke and his colleagues on the Federal Open Market Committee are expected to emphasise their continuing fight against inflation, which is running well above the bank's comfort zone of around 2%, and to rebuff pleas from Wall Street for a cut in the cost of credit to kick-start America's near-moribund economy.

The statement, however, may leave the door open to a rate cut later this year or in early 2009. Economists on both sides of the Atlantic believe the Fed will not cut rates until the number of jobless Americans begins to rise sharply or commodity prices such as oils and metals begin to retreat.

Bernanke will not want to cut rates at this juncture, fearing such a move will start a fresh run on the dollar like the one seen during the summer. This would encourage speculators to dump the greenback in favour of investing in commodities like oil futures, pushing up the price of crude. Oil surged to around $147 a barrel in July during a bout of wild speculation but has since fallen back to hover just above $100.

Bernanke's war against inflation is little comfort to car workers who are joining dole queues in the northern industrial states or businesses struggling to survive in the face of brutal competition from China and other low-wage Asian nations.

The central bank's recent Beige Book - so named because of the colour of its covers - showed the US economy failed to pick up speed in August and the final days of July, as consumers cut back on spending, shopped at discount stores and watched prices leap.

The Federal Reserve described business activity in the period as "weak, soft or subdued" in the latest regular snapshot of the economy. The survey, which includes reports from companies in all 12 Fed districts, signaled that the US economy had spent the summer in a trough, with consumers feeling little relief from government's tax rebates.

Although petrol and oil prices dropped in August, businesses still said they felt squeezed by higher costs for raw materials. In at least half of the districts, including Atlanta, Boston, Dallas and New York, businesses said they had been forced to raise the prices of their products, potentially stoking inflation.

Fed officials, including Bernanke, have warned that the US economy will probably slow for the rest of the year as jobs dry up, house values fall and banks face a difficult financial landscape.

Last month was not an easy time for businesses to push up prices. Consumer spending was slow in every Fed district, according to the report, and when Americans did go shopping, they went to discount stores and non-brand name products.

"Consumers were concentrating on food, staples and other necessary items while reducing spending on discretionary items," the report said. Sales of clothing, electronics and jewellery declined in several regions, and demand dropped sharply for furniture and many household products.

There appears to be little on the horizon that could prompt Americans to start spending again. Fewer purchases will have a substantial ripple effect throughout the economy; in most quarters, spending can account for more than two-thirds of overall growth.

Wages in the United States rose only moderately in August, even as the labour market deteriorated further. The real-estate market worsened or stayed soft across the country, with most districts reporting less demand for both residential and commercial properties. And activity at manufacturing businesses declined, despite an unexpected uptick in factory orders in July.

The Commerce Department reported earlier this month that new factory orders increased 1.3% in July, more than the 0.8% forecast by economists. Exports appear to have accounted for much of the rise in factors, assisted by a cheaper dollar.

July's figures were helped by a 28.1% jump in commercial aircraft. much of which went to overseas markets. Yet excluding overall transportation, which rose 3.2% in July, factory orders would have increased 1%, which was below expectations.

Export sales have propped up many US businesses throughout the downturn, but there were some signs in August that foreign demand is starting to slacken.

"A number of districts reported that export orders were bolstering manufacturing activity, but manufacturers in several of those districts have noted some recent slowing in growth from this source," the report said.

Last week the Labour Department said new applications for unemployment benefits fell less than expected, providing evidence that the struggling economy continues to take a toll on workers.

The department reported that applications for jobless benefits for the week ending September 7 dropped to a seasonally adjusted 445,000, down by 6000 from the previous week, above analysts' expectations of 440,000.

The four-week moving average, which smooths out week-to-week fluctuations, rose slightly to 440,000.

Economists consider claims above 400,000 an indicator of a slowing economy. A year ago, initial claims stood at 322,000.

The number of people continuing to draw jobless benefits also increased, rising 122,000 to 3.53 million, above analysts' expectations and the highest in almost five years. The four-week average rose to 3.43 million.

The figures came out after the Labour Department reported in early September that the unemployment rate rose to 6.1% in August, the highest in five years.

Employers cut payrolls by 84,000, the department said, the eighth straight month of cuts. So far, 605,000 jobs have been eliminated this year. Some economists estimate that figure could grow to one million by the year-end.

Increased unemployment can hinder consumer spending as laid-off workers and those who fear for their jobs cut back on their purchases. That can further weaken the already ailing US economy and will be a cause for concern at the Fed.