President Reagan and Paul Volcker are emerging as contending heavyweights on the American economic scene, with inflation, deficits, and interest rates at the heart of their concerns.
Above all, the President does not want the recovery, which he sees coming later this year, to be choked by a money policy so tight that interest rates soar.
Federal Reserve Board chairman Volcker does not want to lose the gains against inflation that have been won at the high cost of lost jobs and industrial slump. He also is concerned that huge budget deficits, if unchecked, will send interest rates shooting up, no matter what the Fed does.
Testifying Jan. 26 before the Joint Economic Committee of Congress, Volcker urged the Reagan administration and Congress to make ''progressive and substantial'' reductions in the deficits. Otherwise, he said, there would be ''prolonged strain and congestion in financial markets,'' with private borrowers shunted aside.
''We are looking at the need in fiscal 1984,'' said another Fed member in an interview, ''to cut $100 billion out of a deficit that will be above $150 billion.''
The issue has sharpened to the point that the President recently delivered a crisp ''no comment'' when asked if he thought that the Fed chief should resign. Volcker says he has no intention of resigning, and Reagan lacks authority to force him out of office. Volcker's four-year term as chairman extends to Aug. 6, 1983. Beyond that, Volcker's term as a governor runs until 1992. He has the option, after his chairmanship ends, to remain on the board.
Tension between the White House and the seven Fed governors in their white marble building near the Potomac River developed like this:
* Reagan and Volcker agreed from the beginning that the growth of the nation's money supply should be slowed in order to restrain inflation. This policy is bearing fruit. The Fed generally met its 1981 growth targets, inflation dropped below 9 percent, and still appears to be going down.
* Volcker, backed by his fellow governors, had grave doubts about the other side of Reagan's economic program - enormous tax cuts, unmatched by spending cuts. Between now and 1984, $283 billion worth of personal and business tax cuts are on the books. This is much more than the President can hope to cut from federal spending.
In other words, Treasury revenues are falling, while government spending is growing - ballooned by a recession the White House did not expect. The government will soak up an extraordinary share of the nation's available investment capital, as the US Treasury borrows to finance the deficit.
* Many economists, including Fed members, feel that Reagan's huge tax cuts will stimulate private demand for goods and services to the point that inflation might reignite. If the Fed were to accommodate that demand by loosening up on the money supply, inflation certainly would climb. If the Fed keeps a tight rein on the money supply, competition for scarce capital would put upward pressure on interest rates.
That, at least, is the way Wall Street reads the unfolding script, with the result that interest rates - which had declined a few points -- have begun to climb agian.
Reagan's latest slap at the Fed was a complaint that it was letting the money supply grow too fast, not too slow. For weeks the money supply has grown at an unexpected pace, putting the Federal Reserve above the upper limit of its 1982 target range for the key measurement called M-1, comprising currency in circulation and all checking-type accounts.
This growth, said Reagan, sends the ''wrong signal'' to financial markets, indicating to investors that inflation might take off again. This contributes to the upward trend of interest rates.
Volcker and other Fed governors deplore the money supply spurt, but they have been unable to explain it. Tracking money, they say, has become much harder because of new banking laws that established different types of checking and savings accounts.
In effect, Reagan wants enough credit restraint to limit inflation, but not enough to throttle recovery when it comes. The Fed finds this a hard path to follow.
In any event, Volcker is determined to stick to the Fed's anti-inflation fight, saying that all the difficult gains of last year and this would be lost if the bank relaxed too soon.