Want the Fed to Tighten? Don't Hold Your Breath

The recent run of positive economic news has often been mixed with a touch of fear, and Friday's surprisingly strong jobs report is no exception.

The unemployment rate drop to 7.7 percent along with 236,000 new jobs renewed chatter that the Federal Reserve might call an early end to its liquidity party and what that would mean for the five-year bull market run.

So instead of a major rally, Wall Street saw tepid buying, likely held back by the guessing game of how much longer the central bank will keep printing money if the economy continues showing improvement.

(Read More: Job Creation Surges as Rate Falls to 7.7%)

"The Fed conversation has been heating up all year as the market's gone up. It's become front and center of the national discussion, and this is going to add to it," said Jim Paulsen, chief market strategist at Wells Capital Management in Minneapolis.

"It's not so much, should the Fed be tightening, but does the Fed still have to be practicing crisis-like national policy? It just doesn't make sense anymore," he added.

Paulsen said the Fed is likely to be influenced as much if not more by government debt yield as it is the stock market. The benchmark 10-year note briefly touched an 11-month high yield Friday morning at 2.07 percent before pulling back.

Using funds it creates and adds to its $3 trillion balance sheet, the Fed is buying $85 billion a month in Treasurys and mortgage-backed securities. The purchases are part of what is known in market parlance as quantitative easing, or QE.

While the liquidity has coordinated tightly with market ups and downs, some Fed governors have begun to worry about unintended consequences such as inflation.

(Read More: Cramer: Market Has 'Great Faith in Bernanke')

The policy is tied to inflation and probably more so unemployment, which has showed steady gains in recent months and indicated that even if the growth isn't exactly robust, the jobs picture appears well past crisis levels.

"If continued, the strengthening in employment adds weight to views (ours included) that the Fed will taper off asset purchases this year, likely ending QE entirely in early 2014," Steven Wieting, economist at Citi Research, said in a note.

So while few traders said they see Fed stimulus ending anytime soon, a few more strong unemployment reports could force the market to start confronting the scenario.

"When you read through the report it's positive enough to give the Fed encouragement that they're doing the right thing," said Steve Blitz, chief economist at ITG. "When you get into the details, it's not positive enough to indicate that they're done."

Indeed, despite the encouraging headlines the underlying fundamentals reveal some weakness.

(Read More: Indicators May Be Sending 'Wrong Signal': Goldman)

The labor force continues to hold at generational lows as more people quit looking for jobs, while long-term unemployment remains elevated.

Job growth came from some unusual - and perhaps unsustainable - areas such as the motion picture industry, which added more than 20,000 to the total.

Also, the total job creation itself looks good by comparison to the past several years but remains considerably below the level needed to bring down the jobless rate anytime soon to the Fed's 6.5 percent minimum target it has set before tightening policy.

"The question is, how many more months of this do you have to see to be convinced that this is actually the underlying trend of job growth?" Jan Hatzius, chief economist at Goldman Sachs, said on CNBC's "Squawk on the Street" program.

"We've had accelerations in payroll growth before in this recovery. It's then proven to be short-lived," he added. "They want to see sustained growth in payrolls and they also want to see broader signs of improvement."

So despite the jobs numbers specifically and the economic data more broadly pointing up, the Fed is unlikely to take its foot off the pedal soon.

"It's going to take a couple of 300,000 (jobs) months in order for that to actually happen," said Michael Cohn, chief market strategist at Atlantis Asset Management in New York. "We're pretty far away from that."

—By CNBC's Jeff Cox. Follow him on Twitter at @JeffCoxCNBCcom.