The Federal Reserve looked set to lift U.S. interest rates on Thursday for a 17th straight time and will likely hold the door open to pushing them even higher in coming months to ward off inflation.

Fed officials began meeting for a second day at 9 a.m. EDT (1300 GMT), a Fed official said. An announcement on their rate decision is expected around 2:15 p.m. (1815 GMT).

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Most analysts expect the Fed to raise the overnight federal funds rate a quarter-percentage point to 5.25 percent, its highest level since March 2001, although a few have speculated about the potential for a half-point move.

The U.S. economy expanded at a swift 5.6 percent annual rate in the first quarter, the government said in its final estimate on Thursday, but a separate report showed claims for new jobless benefits edged up last week.

The Fed is facing signs economic growth is throttling back from the first-quarter's breakneck pace, leading some economists to argue rates have risen far enough.

At the same time, however, underlying inflation has quickened and questions have been raised about the central bank's inflation-fighting resolve.

Against that backdrop, officials on the Fed's rate-setting Federal Open Market Committee have made clear their first priority is price stability.

"The committee will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained," Fed Chairman Ben Bernanke vowed in June 5 comments that helped cement views that rates were heading higher.

But how much higher is still an open question and analysts will parse the interest-rate announcement the Fed will release after its two-day meeting with particular care for clues.

"We believe the new directive will be at least as hawkish as the last directive," economists at Lehman Brothers wrote in a preview of the Fed's decision.

MORE POLICY FIRMING?

After its last meeting on May 10, the Fed said "some further policy firming may yet be needed to address inflation risks." Fed watchers expect that phrase to be repeated, along with accompanying language on the importance of incoming data to future decisions.

Interest-rate futures markets see about an 80 percent chance the Fed bumps credit costs up by another quarter-point at its next meeting in August, and any change in how the Fed talks about its policy path could shift the odds.

Robert McGee, chief economist at U.S. Trust Co. in New York, said he thinks Thursday's widely anticipated rate hike will prove the last in the now two-year tightening cycle.

"I think they've already done enough to assure that the economy slows down," McGee said. "I think by the end of the year or early next year they'll be backpedaling."

McGee, however, does not expect the Fed to signal a possible rate-cycle pause. He said any shift in language is likely to await Bernanke's testimony before Congress on monetary policy slated for July 19 and 20.

Bernanke told Congress in late April the Fed might take a break from its rate-raising campaign at some point to assess the outlook, which sparked concerns in financial markets that the central bank was soft on inflation.

Since then, Fed rhetoric has largely emphasized the risk of higher prices and markets have shown more faith that the central bank will keep inflation under wraps.

While policy-makers are expected to nod to signs of slower growth, they are expected to steer clear of anything that could undercut their efforts to buttress their inflation-fighting credibility.

"Our guess is that the statement will appear to give more weight to the pick-up in core inflation, creating an initial presumption of another rate hike in August if current trends persist," wrote Lou Crandall of Wrightson ICAP in New York.

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