In what is fast becoming a regular event, the Federal Reserve Board yesterday tightened interest rates another small notch, raising the federal funds rate target to 8.5 percent.

The increase in the sensitive funds rate is the fifth increase of one-eighth point in the last month, and the benchmark rate now stand sa full 2 percentage points above the beginning of the year.

But despite the continued and steady rise in short-term interest rates this year, the basic money supply is continuing to surge - it jumped $4.7 billion last week, for a near-record - consumer installment debt keeps bounding forward; housing starts, while off slightly in August, remain above the 2-million-unit level, which is very strong; business borrowing at backs continues ata superheated pace; inflation remain disturbingly high; and the dollar continues to have serious problems.

In short, it seems fair to conclude that the Fed's pursuit of higher interest rates so far has failed to accomplish its mission, which is to slow the growth in the money supply, to slow the economy and to slow inflation.

At the same time, short-term interest rates have been driven to their highest levels since 1974 when they set records and helped to set off the severe economic recession that began that year.

And, it should be pointed out, the cost of short-term money is now up nearly one-third since the start of the year as a direct result of FED actions, for one of the most inflationary cost increases in the entire U.S. economy.

Although there are abundant fears that a policy of still higher interest once again could trigger a recession, the paradoxical and frustrating situation has drawn increasing criticism from some analysts who believe the Fed has been too gradual and timid in raising interest rates, and thus has produced a high-cost monetary policy with no bite.

"From the time practical monetarism became operative in late 1974 until just recently, the Federal Reserve frequently responded to sharp increases in the money supply by swiftly increasing the federal funds rate anywhere from 50 to 75 basis points," notes Salomon Brothers' chief economist, Henry Kaufman.

"In recent months, however, the Federal Reserve has introduced a policy of pushing the funds rate up by only an eighth of a percentage point every three to four weeks," he adds.

"The policy of inching up the funds rate in response to strong movements of the money supply has raised some serious doubts about the effectiveness of monetary policy," says Kaufman. "First there is the question of whether such a policy can effectively curb excessive monetary and credit growth. Second, it tends to create a credibility gap between the market and the Federal Reserve by casting the FED into the position of a reluctant inflation fighter."

The most problematical and potentially risky situation of all has been created with regards to the mortgage market.

In past years, when short-term interest rates have pierced 7 percent, money has tended to flow out of savings and loans and mutual savings banks, and into high-yield money instruments.

This so-called disintermediation has sharply reduced the funds available for home mortgages, thus dealing the housing market a serious blow.

To prevent this from happening during this interest rate cycle, the FED earlier this year agreed to allow savings institutions to issue six-month floating savings certificates. These proved to be so successful that net inflows to savings institutions in July and August probably totaled between $5 billion and $6 billion.

And although mortgage rates have pierced 10 percent in some areas, this has not deterred home buyers who apparently are anticipating even higher home prices in the months and years ahead, and therefore are willing to pay the rates in order to be able to buy now.

"In these circumstances, the FED is faced with the problem of trying to slow down a demand-pull inflation in the housing sector without the kind of restraining effects usually provided by disintermidiation," economists William Griggs and Leonard Santow note in their latest analysis for the J. Henry Schroder Bank & Trust Co.

"This probably means that the FED will have to place a greater reliance on raising interest rates to restrain housing," they add.

In other words, the FED will have to tighten monetary policy that much more to achieve the same effects that would have been achieved without the savings certificaes, with perhaps greater pain for the rest of the economy.

Meanwhile, Federal Home Loan Bank Board Chairman Robert McKinney said yesterday that his agency, which regulates the savings institutions, "will do all in its power to counterbalance" the FED's continued increase in interest rates.

"I sincerely hope still further tightening by the FED won't be necessary, as it may well be at the risk of a housing collapse," said McKinney in an ususual statement directly challenging the country's central bank.

The Schroder economists point out that a large volume of the savings certificates that have been issued must be rolled over in the first quarter of next year, when rates may be considerably higher, and this could create a particularly difficult problem for the savings banks and their regulators.

The regulators could lower the minimum denomination of the certificates from $10,000 to $3,000 to lessen the refunding problems, but that would only buy time "and leave an even more difficult problem to be faced later, according to the analysis.

As a last resort, the S&L's and savings banks could borrow directly from the FHLBB, which then would have to go directly into the market to borrow a sizable volume of funds early next year, driving interest rates even higher.

So by pursuing a policy of higher interest rates while at the same time trying to mitigate their effects through gradual increases or the development of the six-month savings certificates, the monetary authorities may have set the stage for the kind of credit crunch and severe economic contraction that most forecasters said would not occur in this interest rate cycle.