The financial markets quickly shrugged off the latest signs of a strong economy-but it remains to be seen whether the Federal Reserve will do the same.

Bonds and bank stocks, along with other stocks, tallied gains Friday despite a Labor Department report of much stronger than expected job growth during February, because wage gains were limited.

However, even Wall Street economists who doubted the probability of an interest rate increase by the central bank to rein in the economy and thwart inflation now say the issue is a much closer call than before.

The government reported Friday that nonfarm payrolls had risen by 339,000 in February. That was far above the Wall Street consensus forecast of 250,000. Payroll gains have averaged 227,000 per month during the past year.

"That pace probably must slow for the Fed to remain on hold" beyond its May 20 monetary policymaking session, said Bruce Steinberg, manager of macroeconomic research at Merrill Lynch & Co., New York.

Mr. Steinberg still does not think rates will be raised at the next meeting of the Federal Open Market Committee, March 25. But he conceded that the latest labor market data leave Fed Chairman Alan Greenspan "less wiggle room."

If the Fed should act, as Mr. Greenspan has recently warned may be necessary, many observers think the raging bull market in stocks could screech to a halt. And that possibility has prompted fresh questions about the market's "wealth effect" on the economy itself.

"The stock market boom has added about $3 trillion to consumers' net worth in the past two years," according to Sung Won Sohn, chief economist at Norwest Corp., Minneapolis.

Research by economists has determined that roughly 5% of such an increase is translated directly into additional spending, he said. In other words, since consumer spending rose $512 billion the past two years, nearly one-third of that could be explained by the wealth effect.

Since economists widely estimate that consumers account for two-thirds of overall economic activity, any shift in the wealth effect could have a profound impact.

"No wonder Chairman Greenspan worries about 'irrational exuberance' in the stock market," Mr. Sohn said. "I think we should take him very seriously."

The market-related wealth effect "is one reason why we consumers have been spending as much as we have and incurring as much debt as we have," he said.

"If the stock market crashes, an unlikely scenario, or goes into a significant correction approaching 20%, that could have very negative consequences for consumer spending and for the economy," Mr. Sohn said.

"The bottom line is that the economy has been doing as well as it has because of the stock market," the Norwest economist said. "And so if the stock market falters, there would be a significant impact on economic growth.

"Not only would consumer psychology be damaged, but there would be a 'direct dollar impact' on spending," he noted. "So Chairman Greenspan is quite justified in worrying about the stock market."

Mr. Steinberg, meanwhile, said he thinks job growth will slow in the next few months. He noted that February had "posted the strongest monthly payroll gain of the year in four of the last seven years."

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