When the world's most powerful financial group - the 12 members of the Federal Reserve System's Open Market Committee (FOMC) - meet Tuesday and Wednesday, the big issue will not be whetherm to tighten United States monetary policy, it will be how muchm to squeeze credit.
Short-term interest rates have already moved up in anticipation of such a move.
Some Fed regional banks have recommended a half percentage point boost above the current 8.5 percent discount rate - the interest rate the Fed charges on loans to commercial banks. The Fed's Board of Governors - seven of the 12 FOMC members - is expected to consider these suggestions soon after the FOMC meeting. If the board decides to increase the discount rate, it would indicate an intense desire to prevent a rebirth of inflation - especially in light of the Reagan administration's expressed opposition to a discount rate boost.
Last Thursday White House spokesman Larry Speakes said the administration doesn't want the discount rate increased, but also urged a slowdown in the growth of the nation's money supply.
At the FOMC meeting, the governors and the five voting presidents of regional banks will almost certainly decide to to go along with that suggestion of a slowdown, although not so much because the White House is behind it as because many in the Fed fear a renewal of inflation.
The issue was already controversial at the last meeting of the FOMC in May. ''It was lots of fun,'' noted one official present, with a touch of sarcasm.
Minutes of that session are to be released Friday.
Whether interest rates will rise further, should the Fed slow down the growth of money, depends on the severity of its action.
In the last year, to the discomfort of many Fed officials and of the nation's financial community, a measure of money known as M-1 has grown at a historically high annual rate of some 15 percent, or about a 13 percent rate in the first half of this year.
For various technical reasons, the FOMC abandoned M-1 - currency plus checking accounts in commercial banks - as a monetary target last October. Nonetheless its rapid growth, particularly in the last few months, concerns many Fed officials.
An economist at the Federal Reserve Bank of St. Louis, for instance, is expecting inflation as measured by the broadest measure for the economy - the gross national product deflator - to move up from the 4.5 to 5.5 percent annual rate of the first half of this year to 6 to 7 percent by the end of the year.
''We have already seen some inflationary pressure,'' warns this economist, Dallas S. Batten.
Two key questions will be debated at the FOMC meeting:
* Has the economy already more than enough of a head of steam? Should it be slowed?
Conference Board economist Albert T. Sommers says fast-growing retail trade, a broad-based housing recovery, and rising defense spending are transforming the recovery into ''a full-fledged boom.'' It was reported last week that the nation's major retailers experienced sharp gains in sales in June.
Treasury Secretary Donald T. Regan and the chairman of the President's Council of Economic Advisers, Martin S. Feldstein, have been encouraging the Fed to slow down the pace of the recovery.
Commenting on the economy, Edward G. Boehne, president of the Federal Reserve Bank of Philadelphia, and one of five of the regional bank presidents voting on the FOMC this year, said: ''It is moving along quite briskly. We have a reinforcing, cumulative kind of recovery. That is good.''
Frank E. Morris, president of the Federal Reserve Bank of Boston, said he was not concerned about the rate of growth of the economy. ''It is only six months old. It is a baby.'' He added, however, that the Fed must sustain the recovery ''in a way that doesn't carry the possibility of reaccelerating the inflation rate.''
Certainly the stronger-than-expected recovery will make it easier for the members of the FOMC to decide to restrain money growth.
On the other side of the issue, as one Fed economist noted, the nation remains saddled with high unemployment (10 percent in June, down from 10.1 percent the previous month), high real interest rates (after removing inflation) , and high exchange rates for the dollar. The FOMC members must also be concerned about the impact of higher interest rates on the foreign debt burden of developing nations.
* Are the money statistics, especially M-1, saying anything valid about the supply of purchasing power to the economy?
At one extreme and in a small minority, Mr. Morris argues that because of statistical distortions, M-1 should not be used at all as an indicator of policy. He favors looking at larger monetary aggregates, such as M-2, M-3, total liquid assets, and total nonfinancial debts in determining the wisest monetary policy.
M-1 has been rising far above its target of 4 to 8 percent. M-2 and M-3 are at the upper edge of their targets. The base for M-2, however, was shoved forward to the first quarter of this year, again for technical reasons, and some economists feel this was ''fudging.'' M-2 would also be above target otherwise.
Other Fed officials, although recognizing the technical problems with M-1, still believe it must be watched. ''The aggregates are telling us something,'' said Philadelphia's Mr. Boehne. ''But we can't take the aggregates in some sort of mechanical way. I am not overly alarmed.''
He noted that the financial community, looking at the money supply figures, regards monetary tightening as ''almost an accomplished fact.'' Contrariwise, the nonfinancial business community finds it ''incredible'' that any tightening should be considered.
Economists and Fed officials watch money supply figures, however measured, closely. That's because history here in the United States or abroad shows that the growth of money produces about the same amount of growth in nominal gross national product - the output of goods and services in current dollars - and that high rates of growth in money result in high inflation (see accompanying table).
But since mid-1982 in the US, the money supply and nominal GNP did not track together so well, surprising particularly ''monetarists,'' that is, those economists who have great faith in the predictive powers of the money supply for the economy. Money supply rose rapidly, but the economy did not respond with a recovery until the start of this year. That means the so-called ''velocity'' of money - the rapidity of its turnover - declined dramatically.
Mr. Batten of the St. Louis Fed suggests that one reason for this phenomenon was institutional. The creation of money market deposit accounts and super-NOWs by commercial banks resulted in a surge in M-1. Further, he said, the sharp drop in inflation and interest rates prompted individuals and businesses to hold larger money balances. They felt less pressure to move their money into high-yielding money market funds or Treasury bills, which are not included in M- 1.
Also, he argued, because in the last few years the Fed has been shifting from rapid money growth to slow money growth and back again, jerking the economy around, businessmen have been more cautious about using their money - thus slowing velocity.
Whatever, in the next issue of the St. Louis bank's monthly Review publication, an article will note that M-2 has tracked the economy better than M-1 in the last 18 months.
The big unknown now for the FOMC is whether money velocity will return to its more normal historic growth path. If it does, the economy could take off at a high and possibly inflationary rate.
An econometric model at the Federal Reserve Bank of San Francisco is predicting that unless interest rates are raised, money supply will continue to grow at an 11 percent annual rate in this third quarter. That would indicate that the White House desire to keep interest rates level does not square with its wish to reduce the growth of the money supply. In other words, it may be asking the Fed to accomplish an impossible mission.
When the FOMC does meet this week, it will be chaired by Paul A. Volcker, newly reappointed by President Reagan. There is some suspicion among Fed economists that the FOMC did not move earlier to restrain the growth of M-1 because of the uncertainty of Mr. Volcker's position. Monetary tightening is controversial, because it usually results in higher interest rates, at least in the short term.
How inflation parallels money growth (1973-80) Average annual rates ofm Country M-1 growth Inflation* Italy 18.3% 17.6% United Kingdom 13.0 16.4 France 10.9 10.6 Japan 9.4 7.0 Canada 8.9 10.0 Germany 8.7 4.7 Netherlands 8.4 7.8 Belgium 6.6 7.4 United States 6.4 7.7 Switzerland 3.8 3.6 *Measured by GNP deflator Source; Federal Reserve Bank of St. Louis