Not so long ago, many economists were dismissive of the effects of stock-market wealth on the economy. Equity gains were different than other kinds of wealth, they argued, because people look at stocks as savings for a far-off retirement, not as a reason to buy a brand-new

Testarossa. Moreover, only the well-off had substantial stock positions -- most Americans' wealth was tied up in their homes.

But the sheer magnitude of Wall Street's fourth-quarter run, with its 48% gain in the

Nasdaq

, has overshadowed those arguments. Thursday's strong December

retail sales report is just the latest indication that the U.S. consumer is on a romp, and there is little doubt in the minds of economists, the bond market and, it is reckoned, the

Federal Reserve

that stock-market gains have something to do with that. Lately, bonds have declined on days that stocks ran higher, because market participants worry that the Fed will have to tighten the screws to slow the economy to a sustainable pace.

"The bond-market focus and the Fed focus is justified," says Ethan Harris, senior economist at

Lehman Brothers

. "The wealth effect is steadily growing as an influence on the U.S. economy."

One of the reasons for this, argues Harris, is that stocks gained so much in the late '90s. These days, there's about $17 trillion in stock-market wealth compared with about $6 trillion in annual consumer spending, a ratio of 2.8 to 1. In 1993, that ratio was about 1 to 1. So a given percent change in the stock market has nearly three times the effect on consumer spending as it did five years ago.

"The stock market has really become something very central for the growth prospects of the economy," says Harris. "If the stock market overall gains 20% this year, we estimate, there will be no slowing in consumer spending."

Not everyone buys that math -- but that doesn't mean there's not a pretty big wealth effect on the economy. That fourth-quarter rally is reason enough. Says

Goldman Sachs

director of U.S. economic research Bill Dudley: "I don't know if the wealth effect is more powerful, but the net effect is certainly more powerful, because the stock market has moved so much more."

Fighting the Heck Out of the Fed

This wealth-effect stuff comes at a time when the stock market is steadfastly ignoring the old adage about how you're not supposed to fight the Fed. That puts

Alan Greenspan

& Co. in the bind of trying to slow the economy by raising rates, but not seeing the economy slow because stocks keep going higher. Harris compares it to a car with only one of the brakes working. The bond market has responded to the Fed, but stocks have not, forcing the Fed "to push even harder on the brakes," Harris says. And the disturbing thing is that, as things stand, it doesn't seem like stocks are going to respond at all.

"The stock market is going to be quite resistant to interest rates," says Dudley. "You've already seen that -- there's been 75 basis points and the market's hardly taken notice."

It's not a good situation. The Fed feels it needs to slow things down, but it certainly doesn't want to slow them to the point of stagnation -- a prospect that would probably send the stock market into something more than a correction, and set off a

negative

wealth effect.

It may be that the Fed will have to change its tack, abandon the on-the-one-hand-on-the-other-hand stuff that it usually uses when speaking to the markets.

"A lot of investors in the stock market are unschooled in what the Fed says," contends Henry Willmore, senior economist at

Barclays Capital

. "The Fed has to be a little more blunt when they communicate. They need to use different language."

Willmore reckons that the day when Fedspeak changes could come pretty soon. Perhaps in the statement released after the

Federal Open Market Committee

meeting ending

Groundhog Day, where the panel is expected to up rates by a quarter point. Or it may happen before that -- perhaps as soon as Thursday night, when Greenspan steps to the podium before the

Economic Club of New York

.