Updated from 2:22 p.m. EDT

The

Federal Reserve

raised official interest rates by another 25 basis points Thursday and, while keeping up its anti-inflation rhetoric, said it will continue to base future monetary policy on its interpretation of incoming economic data.

The quarter-point hike, the Fed's 17th in as many meetings, lifts the fed funds rate to 5.25% -- its highest level since March 2001. Back then, Alan Greenspan's Fed was in the process of unwinding a tightening campaign that took the benchmark lending rate as high as 6.5% in May 2000.

Policymakers retained their "data dependent" approach to future policy in the statement accompanying Thursday's decision, saying that while "economic growth is moderating," inflation risks remain.

"Readings on core inflation have been elevated in recent months," the FOMC wrote. "Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."

The portion of the statement dealing with the Fed's future plans underwent subtle but possibly significant modification. After its last meeting in May, the Fed said "further policy firming may yet be needed" to control inflation. That passage is replaced in Thursday's communique with broader, more conditional language.

"Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the committee judges that some inflation risks remain," the FOMC said. "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the committee will respond to changes in economic prospects as needed to support the attainment of its objectives."

The next Federal Open Market Committee meeting is Aug. 9. Prior to today's announcement, futures markets were pricing in an 80% chance of another quarter-point hike on that date. Those odds fell to about 55% after the announcement.

"For the first time, the Fed acknowledges that the labor market is tight, rather than just tightening," said Ian Shepherdson, chief economist with High Frequency Economics. "But on the question of future hikes, the Fed has dropped the line that 'further policy firming may yet be needed,' replacing it with the rather softer idea that slower growth 'should help limit inflation pressures over time.' In other words, there has been an outbreak of rationality at the Fed."

The Fed's last meeting on May 10 ushered in a period of weakness and extreme volatility in global asset markets. Heading into Thursday, the

S&P 500

is down 79 points, or 6%, since the last rate decision, while the

Nasdaq Composite

had lost 9.7%. In more than one-third of the 34 trading sessions since the May 10 announcement, the

Dow Jones Industrial Average

closed with a gain or a loss of at least 90 points.

Bonds have also felt pain, with the yield on the 10-year Treasury sitting at a four-year high after spending much of 2004 and 2005 resisting the Fed's pressure. Intermittently over the past three months, the yield curve between two- and 10-year government bonds has inverted, a phenomenon that has in the past presaged economic malaise.

The specter of a Fed-induced recession has hammered commodity markets, with the exception of oil, which has remained supported by concerns about Iran's nuclear program. Gold peaked around the time of the May 10 meeting and, at about $590 an ounce now, has given up 15% of its price since then. Copper has seen a similar correction.

To view Liz Rappaport's video take of today's Fed decision, click here

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Since future Fed policy remains fluid, commentary by voting members of the FOMC has taken on added significance. Ben Bernanke, whose congressional testimony in late April wrongly convinced financial markets that a "pause" was imminent in the rate hike campaign, spent much of the last two months in a hawkish public posture.

Bernanke's most significant commentary came on June 5, when he told a banking conference in Washington that inflation readings "have been higher in recent months" and "are unwelcome." At the same time, Bernanke noted a slowdown in consumer spending, raising fears of stagflation and sending the Dow down 199 points in one day.

Economic data in the intra-meeting period has also been troublesome. On June 14, the Labor Department said its consumer price index rose 0.4% in May, including a 0.3% rise in its core components. Compared with May of last year, the rate of gain in the core index was 2.4%, slightly above the Fed's comfort zone of 2%.