The Market Is Not the Economy: What the Fed Misses
Whatever course it chooses, the Federal Reserve will have to grapple with the reality that while its policies have helped levitate stocks, they've been considerably less effective at expanding the economy.
While rising equity prices help add to total growth, the stock market is not the economy.
The U.S. economy, rather, is propelled by consumption, which accounts for about 70 percent of gross domestic product.
That consumption in turn, is generated by wealth, and the signs are growing that benefits of a skyrocketing stock market have been disproportionate.
"We've made rich people richer," Dallas Fed President Richard Fisher told CNBC in a Monday interview.
"This is great for the (Warren) Buffetts and for others who can take advantage of this multiple of great money and cheap money that's been available," he added. "The question is, what have we done for the working men and women of America?"
(Read More: QE Halt 'Too Violent' for Market: Fed's Fisher)
While employment gains have been steady, they also have been unspectacular.
Weekly jobless claims have been moving around in a volatile range, spiking in the most recent week to 360,000. May job creation is likely to be around 150,000, considered a breakeven for absorbing the amount of new entrants to the labor force.
As for the "wealth effect" the Fed had hoped to achieve by boosting the stock market with $85 billion of money creation every month, it indeed, as Fisher suggested, has been skewed to upper income levels.
(Read More: 'Profitless Rally': Stocks Heading for a Slowdown)
A recent Gallup poll paints the picture: Stock ownership is at record lows, with just 52 percent of Americans holding equity stakes either through individual stocks or through retirement accounts.
Moreover, the poll shows that the middle class has taken a big step backward from the stock market.
In April 2008, 66 percent of adults with incomes between $30,000 and $74,999 owned stocks; that number had plunged to 50 percent in April 2013. Just 21 percent—down from 27 percent—of those earning under $30,000 held stocks, while 81 percent above $75,000 were in the market, down from 88 percent.
A skeptic on the current Fed approach, Fisher said the tide won't turn until government fiscal policy complements Fed monetary policy.
"Government is not the future, the private sector is the future," he said. "Right now, (companies are) using cheap money to buy back their stock, pay extra dividends, etc. etc. We all know what is going on."
(Read More: Amid Rally, Market Flooded With Shares)
Private sector economists at big Wall Street firms have begun turning up growth expectations, but that's been a regular exercise since the end of the financial crisis that has consistently been countered with hard reality.
Citigroup, for instance, said it expects growth as high as 3 percent—right around the historical trend mark—after a near-term bout with anemic 1.5 percent gains.
"The drag from earlier tax hikes may be easing up on schedule as stronger employment and more supportive financial conditions buoy demand," Citi economist Robert V. DiClemente said in a report.
Growth, though, has consistently disappointed, and it's been the Fed's self-appointed task to step in and continue to goose stocks.
Keeping rates at extraordinarily low levels has "large and significant effects on equity prices," according to an analysis that Goldman Sachs released over the weekend.
The piece addressed a long-standing debate over why the Standard & Poor's 500 has risen more than 140 percent since the financial crisis—specifically, whether it's been the Fed or fundamental economic growth.
(Read More: JPMorgan Goes All-In on Rally; Sees Surge Growing)
Goldman's analysis looked at market performance in response to interest rate cuts and found that a quarter-point cut in rates usually leads to an immediate 1 percent gain in stock prices. Financials and rate-sensitive consumer stocks reaped the most benefit, while energy, staples and health care have shown little reaction over time.
"Taken together with our dovish view of the Fed ... this reinforces our generally upbeat view of the equity market, particularly our top-trade recommendation to be long in large-cap U.S. banks," economists Sven Jari Stehn and Noah Weisberger said.
Prospects for the economy, though, are less certain, and Fisher said they likely won't turn around until responsible fiscal policy replaces unprecedented monetary policy.
"What I'm focused on is the movement toward putting people back to work and the efficacy in monetary policy in getting that done," said Fisher, adding that current conditions will persist until "uncertainty" over fiscal policy is addressed. "Until then we're just underwriting these guys for not getting their job done."
—By CNBC.com Senior Writer Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.