The Federal Reserve acts as fiscal agent for the Treasury in the selling of government's debt. This has not been an easy task over the past three years and promises to keep the busiest man in Washington -- Frank Cavanaugh, the head of the Treasury's debt management -- very occupied for some time to come.

Cavanaugh's calling was not made any easier last week, when Federal Reserve Chairman Paul A. Volcker announced that he was concerned with the excessive growth of the monetary aggregate of M1. This statement was all the more alarming when you consider that the Treasury market must absorb $46 billion of new Treasury issues between March 14 and March 24. Of this large amount, $15 billion represents new money.

Volcker's message is startling for two reasons. First, the chairman has been announcing to the world since early fall that M1 meant very little as far as determining Fed policy, and that the broader measures, M2 and M3, were much more meaningful.

Second, Volcker, in his mid-February appearance before the Senate Banking Committee, established broad new targets in which the aggregates might grow. In just three weeks, a warning signal has been hoisted and the optimistic feeling for lower interest rates has been at least temporarily interrupted. The market had felt that interest rates would decline further and that the Fed would then follow by lowering the discount rate. Now, with the chairman's statement, all bets are off and short-term interest rates have risen about 50 basis points.

Confusion as to the direction of rates now exists not only in the minds of the buyers but also among the government dealers who must underwrite most of the new issues. They are now in the process of ascertaining the amount of concession they will need from the marketplace to carry the large positions they will underwrite.

At the same time the dealers can only hope that they can redistribute as much of the new issues as possible before they must pay for the issues and position any unsold securities. Once delivery has been made, the dealers must then hope that the cost of carrying these securities -- mostly through repurchase agreements -- remains far below the interest being paid on the securities. The wider the spread, the easier it is for the dealers to redistribute the securities. But, if the spread should become quite narrow, the dealers will become anxious and sell, forcing rates to rise.

The Treasury will offer a two-year note on Wednesday, in minimums of $5,000. They should return 9.70 percent. In the tax exempt area, an A-rated InterMountain Power Authority issue will be offered. It could be anywhere from $750 million to $900 million in size. The long-term bonds could return 10.50 percent.