(Clerks in the Euro Dollar Pit at the Chicago Mercantile Exchange Mary Carroll, Brandon Gray Luis Ortez, Jim Aldrich and Angel Garcia react after the Fed raised interest rates, May 10, 2006. The U.S. Federal Reserve lifted U.S. interest rates for a 16th straight time on Wednesday, and said it may need to raise rates more to keep inflation risks down in its nearly two-year-old credit-tightening campaign. Photo: Reuters)

The Federal Reserve raised its benchmark short-term rate on Wednesday by a quarter-percentage point to 5 percent, the highest level in five years, and signaled it may take a pause in pushing rates up further.
  
The rate hike marked the 16th consecutive action that the U.S. central bank has taken to tighten credit since June 2004 when its federal funds rate, the rate charged by commercial banks on overnight loans, stood at a 46-year low of one percent.
  
In a brief statement following its policy-making meeting, the Fed said it "judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."
  
What the central bank is trying to tell the markets is that this is not the end of its rate-hiking campaign but there will be at least a brief pause in boosting rates. And the "extent and timing" of further rate hikes will depend on future economic data, according to analysts.
  
In assessing the current state of the economy, the statement said that "economic growth has been quite strong so far this year" and the Fed "sees growth likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."
  
The statement said that the surge in energy prices so far appeared to have had "only a modest effect on core inflation" with inflation expectations remaining contained.
  
Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures, said the statement.
  
In any event, the Fed "will respond to changes in economic prospects as needed to support the attainment of its objectives," the statement said.
  
In a related action, the Fed decided to boost the discount rate by a quarter percentage point to 6 percent.
  
As the Fed's primary lever, the federal funds rate directly influences other short-term rates, such as the prime rate on business loans and consumer loans linked to the prime. The Fed's decision to hike the rate means higher interest rates for both consumers and businesses.