Sen. Jake Garn (R-Utah), chairman of the Senate Banking Committee, yesterday called money market mutual funds "unfair competition" for financial situations.

In just two years the assets of these funds have grown from $10.9 billion to $83.9 billion this week, thanks to their complete liquidity and high yields, now averaging more than 17 percent. Many funds also allow customers to write checks on their accounts. Yet, because these funds lie outside the banking system, they are not subject to the same reserve requirements as banks.

Speaking to the American Bankers Association, Garn said, "A lot of people would be scared if a money market fund failed. But I suppose the other funds would collectively get together to prevent such a failure." Saying that money market funds do an "end run around normal banking," he told his audience he plans to consult government regulators in an effort to settle once and for all whether the deposit and checking powers of money market funds put them in the banking business.

During last spring's credit crunch, the Federal Reserve imposed reserve requirements on money market funds, a move that immediately was challenged by the industry, which maintained that the Fed has no jurisdiction over nonbanks. This controversy undoubtedly now will be up to Congress to resolve.

Garn declined to discuss this year's legislative calendar until all the regulatory posts have been filled by the Reagan administration. He did say that the "watchword [of the banking panel] will be oversight. No more bold new initiatives. I'm sick of that rhetoric. What's wrong with making work what you've already done?" he asked.

A case in point is the truth-in-lending law which, he said, needs a drastic simplication to accomplish its original intent of clearly informing consumers of finance charges.

Much of Garn's talk centered on the administration's theme of cuts in government spending, as contrasted to a chiefly monetarist policy under President Carter and Fed Chairman Paul Volcker. "I'm not a monetarist [who tries to] fine-tune the economy by tinkering with numbers," he said in defense of an independent Federal Reserve. Then he added, "When I was mayor of Salt Lake City and needed a new fire chief, I didn't hire the chief arsonist at the state penitentiary. So I'll be damned if Congress should handle the money supply."