Back in 1965, much as today, the Federal Reserve's main inflation gauge was running at a low 1.25%, labor costs were growing slowly and the unemployment rate was half a percentage point above what then was viewed as optimal.
Just 18 months later, however, core inflation jumped to more than 3%, labor costs soared and the jobless rate fell more than half a point.
John C. Williams, president of the Federal Reserve Bank of San Francisco, recently cited this historical comparison in a speech as a reminder of how fast things can change when the economy is strong.
Williams himself doesn't see a similar scenario unfolding this time, but some of his colleagues at the Fed are worried that the central bank may be waiting too long before raising rates and could soon find themselves playing catch-up to an economy roaring ahead.
The Fed is at a crucial turning point. After years of keeping its benchmark interest rate near zero to stimulate a sluggish economy, policymakers are on the verge of lifting borrowing costs for the first time since 2006. The Fed signaled last week that it could nudge up rates as soon as June, although analysts are betting it will be in September.
What factors would determine the timing of the first rate hike? How might the strong dollar and the slipping economic momentum in the first quarter weigh on the thinking? Where might interest rates settle in the long run?
In an interview with the Los Angeles Times this week, Williams shared his views on these and other issues being considered by the Fed. Williams is a centrist on the policymaking committee, which consists of five Fed governors and five of the central bank's 12 district presidents.
Williams noted that the key consideration on raising rates has shifted from what's happening in the labor market to inflation.
The Fed has a dual mandate, to maximize employment and maintain price stability. During the slow recovery from the Great Recession, officials favored aggressive policies to stimulate the economy and confront high unemployment, despite concerns from some that the Fed's actions would trigger rising inflation.
But in the last year the labor market has outperformed expectations. Job growth has accelerated to more than 290,000 a month on average over the last six months, and the unemployment rate has fallen to 5.5%.
Like most others at the Fed, Williams expects the jobless rate to fall further, to about 5% by year's end, a level that he sees as full employment, or the rate before inflationary pressures build.
Williams said job growth may slow in the coming months as economic growth has weakened some this year, but the labor market "still has a lot of momentum going forward, and I have a lot of confidence in that."
Inflation, meantime, has been running well below the Fed's target of 2%. A persistently low inflation rate is worrisome because it reflects weakness in an economy and risks deflation, a condition of falling prices that can cripple spending and economic growth.
The strong dollar, which pulls down import prices, and the fall in oil prices have suppressed the rate of inflation, but Williams believes that the effects of these two factors will ebb.
As the labor market tightens, wage growth, which has been a missing part of the recovery, should rise more rapidly and push up inflation.
"In the second half of this year, I expect inflation to move back up gradually as we get to full employment and the economy gets back to normal," he said.
One factor that could delay a rate hike is a persistent slowdown in economic growth. Lackluster consumer spending, home-building and manufacturing have prompted forecasters to mark down economic growth in the first quarter to little more than 1%, compared with 3.75% in the second half of last year.
Williams attributes the weakness partly to the severe winter weather and possibly to work stoppages at West Coast ports that disrupted economic activity. The strong dollar has hurt U.S. exports, as has weakness in Europe and other major economies.
Still, Williams expects economic growth in the U.S. to bounce back in the second quarter and end the year up about 2.5% from last year, a rate that is above the long-run potential of about 2%.
On the soft consumer spending, Williams said another reason besides the winter chill that has kept consumer spending in check may be the lessons learned from the consumption binge and hangover from the last decade.
"The saving rate and [other] data do show a little bit more caution by households to not stretch so much in their budget," he said. "That's a healthy thing for the long run."
Whenever policymakers pull the trigger on rates, Williams foresees gradual subsequent increases over a long period before rates return to normal.
And it will be a new normal, he said, one where the real interest rate is likely to settle at a lower level by historical standards, reflecting an aging labor force and other structural factors resulting in an economy with a slower growth potential.
"Even as we normalize policy over the next few years, the cost for mortgages, cost for car loans, business loans and things like that will actually be, on average, lower than we've seen in the past," Williams said.