The fate of the Treasury market all week centered on the release of the Federal Reserve's monetary figure late Friday afternoon. Despite the fact that many market participants now think the Fed has eased its credit posture to allow interest rates to fall somewhat, enough doubt remained to cause the market to give up a portion of its gains during the previous two-week rally.

Some weeks ago the money supply bulge in early July was expected to be $5 billion to $7 billion. But recent money supply figures have shown such a sizeable decline that the market was no longer concerned about the expected bulge. But as the week began, analysts came out with new figures that shook the market. An increase of $9 billion to $12 billion was projected, a number not to be sneezed at, and the market quickly retreated. However, all of the earlier losses were recovered as the Fed continued to add reserves to the banking system during the remainder of the week. But many investors took profits and withdrew into the defensive haven of short-term Treasury bills to await the Fed's release.

Away from the Treasuries, the municipal market continued to be deluged with new housing issues that forced higher yields in some of these issues. Many of the housing bonds were state names, were rated double A and returned yields of 13 1/2 percent. A $400 million single-A-rated power authority bond also offered a return of 13 1/2 percent on bonds due in 2017. In the short end of the municipal market, the $2 billion issue of HUD project notes were aggressively bid for, with the bulk of the issue yielding 7 3/4 percent. Unfortunately, investors wanted higher returns and over half of the issue remained unsold until the end of the week, when the decline in short rates helped to reduce the outstanding float to around $700 million.

The question asked most often today is, how do we get interest rates down from these historically high levels? For the economy is going absolutely nowhere with rates so high.

Two problems must be solved to reduce interest rates. The first is the huge federal deficits. They simply must be curtailed, which means either bringing in more revenue by increasing taxes or cutting federal spending. Unfortunately, a recession doesn't generate more tax revenue, nor does it help the economy to recover by increasing taxes on consumers and corporations.

So Congress must cut expenditures now to reduce the prospective mammoth deficits. But this is an election year and tampering with Social Security, Medicare and various social programs is politically unfeasible. It is doubtful that Congress will attempt to solve this problem until after the election, if then.

The other problem is the reduction in short-term borrowings by corporations and the U.S. Treasury, for it is this demand for short-term credit that has kept short-term interest rates high, which in turn has prevented long-term rates from declining. At the same time, there has never been a recovery until corporations have been able to restructure their balance sheets by paying off loans and by funding their short-term debt with longer bonds. But intertwined with the demand for short-term money are the problems of huge deficits and high interest rates. Consequently, it is difficult to see how the demand for short-term money can be reduced short of a much deeper recession or some unforeseen event.

By the way, those investors who bet on the money supply being up only $5 billion to $7 billion won their wager. And by week's end there were many more converts to the belief that the Fed has eased credit.

The Treasury will offer a two year note on Wednesday in minimum denominations of $5,000.