The US Federal Reserve has raised interest rates by a quarter of a percentage point to 5.25% as it looks to slow inflation.
The Fed's Open Market Committee has raised its key interest rate for the 17th time in a row to its highest level in more than five years.
Federal Reserve head Ben Bernanke said the risk of inflation could well require "some further policy firming".
But he also indicated that the string of rate rises could be nearing an end.
"Ongoing productivity gains have held down the rise in unit labour costs, and inflation expectations remain contained," the Fed said in a statement.
"However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."
On Thursday New York crude oil rose by more than $1 to hit $73.
Analysts remain split over how long the Fed is likely to extend its run of rate hikes.
"There is a sense that another rate hike by the Fed will not be automatic," said David Jones, head of consultancy at DMJ Advisors.
"This is a relief rally."
US stocks soared on the news, seeing it as a sign that the Fed's two year credit-tightening policy could be slowing down.
The Dow Jones Industrial Average closed 217.24 points higher, or nearly 2%, to reach 11,190.8, marking its highest gain since April 2005.
The Nasdaq index of technology stocks saw a dramatic rise of 62.5 points, or close to 3%, at 2.174.38, its highest rise in over two years.
Meanwhile the Standard & Poor 500 was 26.87 points, or 2% higher, at 1,272.87, its biggest climb since October 2003.
However some are not changing their positions.
"Lehman Brothers still expects the Fed to raise rates another 25 basis points in August and follow up with a final 25 basis point rate in October," said David Mozina of Lehman Brothers.
The problem for the Fed is that while prices have been rising faster than officials would like, other recent data has indicated that US economic growth is slowing.
Concerns that higher interest rates may slow US growth just as consumer spending dips and the housing market cools have prompted a sell-off in global stock markets during recent weeks.
"We are at a turning point right now and not even the Fed can be sure how much more needs to be done," said David Jones.
Analysts also have complained that Mr Bernanke is giving out conflicting statements on the direction of the Fed's rate policy, increasing and amplifying the recent market volatility.
"He's talking way too much and he says one thing one day and then says something entirely different the next day," said Martin Regalia, chief economist at the US Chamber of Commerce and a former Fed economist, earlier in the day.
"This is not increasing transparency. It is increasing confusion," she added.
Elsewhere, the Commerce Department released figures on Thursday showing that the US net debt to the rest of the world hit a record of $2.69 trillion at the end of 2005.
It said that Americans held overseas assets - such as shares, bonds and factories - worth $10.01 trillion, while foreign owners held $12.70 trillion in US assets.