Financial markets expect the U.S. Federal Reserve to announce on Thursday it has kept benchmark borrowing costs unchanged for the eighth straight meeting, marking a full year since the last increase.

The Fed gathering comes as turmoil in the subprime mortgage market has raised concerns about the potential for broader spillover into financial markets and boosted new talk about a rate cut.

The economy, however, has appeared to be regaining vigor after an anemic first quarter, arguing for a steadier course. The Fed expects the economy to remain on solid ground, the labor market to remain tight and commodities prices to stay high. It is unlikely to abandon its vigilant stance even though it sees price gains moderating.

Fed officials will bring to the table forecasts for the central bank's semiannual report, which Chairman Ben Bernanke will present to Congress in late July.

Policy-makers will also renew a discussion on communications issues that has encompassed debate on setting a numerical inflation objective and providing more detailed economic forecasts.

A Reuters poll on June 6 showed all 18 primary dealers surveyed expected the Fed to hold steady this week, with 10 predicting its next move will be to cut rates.

If the Fed stands pat as expected on Thursday, it would be almost one year to the day since the central bank last raised rates. The June 29, 2006, rate hike was the last of 17 consecutive increases dating to June 2004, which took the overnight federal funds rate to its current 5.25 percent from 1 percent.

Following are some factors that Fed policy-makers are considering:

INFLATION

* Overall consumer price index was up 0.7 in May, but core prices rose just 0.1 percent. Core prices were up just 2.2 percent above their year-ago level, the smallest gain since March 2006.

* The Fed's favored inflation gauge, the price index for core personal consumption expenditures, showed a 2 percent year-on-year rise in April, the smallest in more than a year. Some Fed officials say they would like to see the index below 2 percent.

* Import prices in May rose 0.9 percent, the fourth straight monthly gain, on higher petroleum costs.

ECONOMY

* The economy grew at a sluggish 0.6 percent annual rate in the first quarter. A final reading on Wednesday is expected to show 0.8 percent growth. But economic data since then has indicated growth will pick up in the second quarter.

* The economy added 157,000 new jobs in May on a surge in hiring by the services sector. The unemployment rate was unchanged at 4.5 percent.

* The Institute of Supply Management said its factory activity index rose to 55.0 in May from 54.7 in April. The ISM's services sector index rose to 59.7, its highest level since April last year, from 56.0.

* Retail sales in May rose 1.4 percent, the biggest gain since January.

HOUSING

* Soft data showed the housing sector continued to drag on the economy. Housing starts slipped 2.1 percent in May, although permits rose 3 percent.

* Sales of existing U.S. homes fell 0.3 percent in May to the lowest level in four years, and the inventory of homes for sale rose by 5 percent. It was also the 10th straight month in which prices dropped from year-ago levels.

* Sales of new single-family homes fell 1.6 percent in May, while prices rose from April.

* The rate of home loans entering foreclosure hit a record during the first quarter.

Ben Bernanke Inflation