President Reagan's grand design for the US economy thrusts a heavy burden on the Federal Reserve Board in the nation's fight against inflation. No one is more aware of that burden than Fed chairman Paul A. Volcker and his cohorts at the white marble palace here that houses the nation's central bank.
Inflationary fires continue to burn brightly in the United States, as evidenced by last month's hike in wholesale prices, 16 percent at an annual pace.
Some of that rise was volatile and could level off. But, warns Mr. Volcker, wages continue to climb throughout the economy at roughly a 10 percent annual rate.
That fact, he says -- combined with low productivity --indicates that little on the horizon so far is "fundamentally favorable on the inflation front."
Strategy of the Fed in an inflationary economy is to batten down the credit hatches, slowing the economy by making it more expensive to borrow money.
The aim of Mr. Volcker and his fellow governors is to prevent the supply of money from expanding so quickly that it adds to inflation, at a time when the government and the private sector are competing for credit.
By applying the credit screws last year, the Fed helped to drive interest rates to record heights. At least two major industries, housing and autos, were shoved into deep recession.
This year, the Federal Reserve plans to restrict the growth of money even more, a policy with which the Reagan White House fully concurs.
But the Reagan administration also foresees a brisk expansion of the economy, with a real growth of 4.2 percent in 1982 and 5 percent in 1983.
Herein lies an "inherent contradiction," as a Fed official put it. Business growth requires more money. The Fed promises less, in order to slow inflation.
This sets the stage for intense competition for credit --especially if the federal government continues to borrow to finance huge deficts. Interest rates, in such a scenario, shoot up and the economy slows down.
"Tight money," said a Federal Reserve source, "affects real growth, before it slows inflation."
In the long run, in other words, a tight-money policy will brake inflation. But along the way it will retard the economy, throwing people out of work.
The process, Mr. Volcker says, "is not painless."
Must it work this way? White house officials believe not, citing several factors:
* Budget deficits will shrink, they believe, leading to a balanced budget by 1984. This would greatly reduce pressures on financial markets, lowering interest rates.
* Lower taxes for individuals should stimulate extra income and the desire to save. Fresh business investment will spur productivity, increase the flow of goods, and prompt economic growth.
Some of this investment, if all goes according to the White House plan, would be generated internally -- out of income, not through borrowing.
Putting all this together, White House officials see no inevitable contradiction between tight money and a briskly growing economy.
Economist Walter W. Heller, by contrast, believes the Reagan economic plan is "seriously flawed," partly because of a clash between two opposing policies -- rapid economic growth and tight money.
"The conflict," Dr. Heller says, "is fundamental: until inflation is substantially lower, monetary police as currently targeted will frustrate Mr. Reagan's . . . policy for economic expansion."