Paul A. Volcker, chairman of the Federal Reserve Board, made it perfectly clear in testimony before the House and Senate Banking committees last week where he thought the blame for high interest rates lies.

In direct contrast to statements by the Reagan administration that high interest rates are the result of the erratic growth in the money supply, which is administered by the Fed, Volcker placed the blame for high rates at the doorstep of the prospective high budget deficits. Volcker called those deficits a hazard to the financial markets of today and of the future, and pointed out that they could easily choke off any chance of an economic recovery.

Interestingly enough, agreement with Volcker came from Alan Greenspan, a former chairman of the Council of Economic Advisers and currently a private adviser of the administration. Congressional reaction was swift in opposing the new budget, especially by Republicans. The hue and cry from all sides may force revisions in the budget that could eventually benefit the financial markets, but the battle should be bloody and long.

In the meantime, while under the deficit cloud, the bond markets will bounce around and be governed by technical forces. As the supply builds in a certain sector -- Treasuries for instance -- government rates could move higher. However, the municipal market is now faced with a light new-issue calender, which should help improve prices of tax exempts and help rates fall.

The huge Washington Public Power Supply System tax-exempt revenue issue was foremost in investors' eyes last week. The demand for this quality issues was so great that its size was increased 70 percent, from $500 million to $850 million. The longer maturities were repriced, lowering the return from 15.06 percent to 14.85 percent. Individuals purchased the bulk of the issue, but unlikely investors such as pension funds and hedge funds were also among the buyers.

Short interest rates have continued to move up. The all-important federal funds rate has risen from around 12 1/2 percent during early January to 15 1/2 to 16 percent last week. Even though technical reasons may be responsible for the increase, the funds rate has remained at each succeedingly high level.

Short-term, tax-exempt project notes came at good presale levels but then fell about 25 basis points as a strong demand from tax exempt money market funds pushed prices higher. By weeks' end, Julys were available at 7 3/4 percent, Augusts at 8.10 percent and Septembers at 8.05 percent.

The flood of new Treasury issues will continue this holiday shortened week. On Tuesday, $10 billion of three-month and six-month bills will be auctioned. Wednesday, $5.25 billion of two-year notes, available at minimums of $10,000, will be sold. $5.25 billion of year bills will sell on Thursday, while the Federal Farm Credit System will offer $3.3 billion of six- and nine-month paper, plus an intermediate issue on Friday.