The seal of the US Federal Reserve. Photographer: Graeme Sloan/Bloomberg Photographer: Graeme Sloan/Bloomberg

A shift is underway at the Federal Reserve in how to describe “neutral”—the interest rate level that neither stimulates nor restrains growth—as the agency debates how much higher to hike rates.

“Neutral” is an abstract concept, yet the stakes for setting it correctly are high: If the assessment of what rate is “neutral” is too low, Fed policy could provide too much stimulus to the economy as it fights inflation. If it’s too high, policy will be more restrictive than planned. Either could result in a damaging policy error.

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