WASHINGTON, August 5, 2008 (AFP) - Federal Reserve governors met Tuesday to mull interest rates and the health of the US economy with most economists predicting the Fed will keep rates on hold at 2.0 percent for a second straight time.

The central bank is due to announce its rate decision around 1815 GMT.

Economists said the Federal Open Market Committee (FOMC) will likely stand firm, despite a government report Monday showing a cooldown in consumer spending and a spike in inflation pressures.

Analysts say the Fed is caught between a rock and a hard place because a cut in the federal funds rate could spur inflationary pressures while a rate hike could stymie fragile economic growth.

'We expect the Fed to leave interest rates unchanged,' Deutsche Bank economists said in a market update.

A strengthening of the dollar and a cooling off of oil prices in recent weeks will have soothed Fed fears of increased inflation somewhat, but economists still expect the central bank to stress concerns about prices in its policy statement.

Oil prices have tumbled around 28 dollars in recent weeks to 119 dollars a barrel Tuesday after striking record peaks above 147 dollars last month.

US stocks raced higher ahead of the Fed announcement with most traders seeing the rate decision as a foregone conclusion, as Wall Street got a boost from lower oil prices and as Procter & Gamble unveiled a hefty jump in profits.

Scott Anderson, an economist at Wells Fargo, said the world's biggest economy has been throwing off conflicting signals which makes it likely that the Fed will not want to tinker with rates yet.

The world's biggest economy grew at a 1.9-percent pace in the second quarter which marked an improvement from the first three months of the year, but growth got a timely boost from a giant 168-billion-dollar emergency stimulus.

And although the unemployment rate ticked up to 5.7 percent during July, a four-year high, economists say job losses this year are not as bad as in prior recessions.

Some analysts believe the 14-trillion-dollar US economy has already fallen into a recession -- the government revised its tally for 2007 fourth-quarter growth last week to a negative 0.2 percent -- but others say a recession will be averted.

If market predictions come true, the Fed will keep rates unchanged for a second straight time Tuesday after slashing rates aggressively by 3.25 percentage points between September and late April.

The Fed, led by chairman Ben Bernanke, cut rates in a bid to fire up economic vitality which has been threatened by a lingering housing market downturn, a credit squeeze in the banking industry and searing oil prices.

'I think the housing market is really the central element of this crisis,' Bernanke told Congress last month, signaling that a potential housing rebound could trigger an economic revival.

The central bank is unlikely to raise rates until the housing market stabilizes, especially as stretched consumers are cutting back on big-ticket purchases such as cars and household appliances.

Some analysts say the Fed would like to raise rates, in part to ward off the inflationary risks presented by high oil prices, but they say the ailing housing market has boxed policymakers into a corner.

The government report released Monday, showing headline inflation jumped 0.8 percent in June to post its strongest monthly gain since 1997, may heighten the Fed's inflation debate.

'Yes, consumer price increases are so high that the inflation hawks will be screeching like crazy at tomorrow?s FOMC meeting. Expect some strong language about inflation in the statement but no action,' said Joel Naroff, a chief economist at Naroff Economic Advisors.

The panel is expected to lift rates next year on the premise that the housing market will recover, inflationary pressures will ease and wider growth will start to improve.