As the highly volatile and very important federal funds rate rose during the week, buyers withdrew to the sidelines to wait and see how interest rate movements would unfold.

The federal funds rate is the cost that member banks of the Federal Reserve System charge when they lend their excess reserves to one another. It is the cost of overnight money, and, as such, shows the tightness or ease within the banking system.

The funds rate generally depicts Federal Reserve policy intentions. Recent market fears that the Fed would be forced to tighten credit because of the explosion in the monetary aggregates has forced market participants to focus even more on the federal funds rate.

Many feel that since the funds rate has traded above 9 percent, the Fed has tightened credit. However, a host of technical factors has also been putting considerable pressure on the banking system, which clouds the true meaning of the increase in the funds rate.

Nevertheless, as confusion and theories abound, government rates--especially short-term rates--have risen, and events are setting the stage for a large municipal calendar that will be sold over the next 30 days. In fact, when the 30-day forward supply of $4.6 billion "muni" financings is combined with the $2 billion in dealers' inventory, a high for 1983 results. This $6.6 billion figure, together with the uncertainty in the taxable area, should provide attractive buying opportunities in the tax-exempt sector.

Two large, tax-free, short-term note issues should reflect the rising rates in the short-term taxable area. On Tuesday, $1.1 billion in government-backed (HUD) project notes will be sold. They will mature monthly from August of 1983 to May of 1984. They should return between 4.50 and 5.25 percent.

On Wednesday, the State of New York will make its annual trip to the market to borrow $3.7 billion of tax revenue anticipation notes. They will mature Sept. 30 and Dec. 31, 1983, and Jan. 31 and March 30, 1984. As of now, it is uncertain whether the issue will receive the highest Moody's note rating, MIG-1. If rated MIG-1, they should return 5.25 to 5.50 percent. If rated lower, at MIG-2, they should return 5.40 to 5.75 percent.

The largest segment of the 30-day municipal calendar is the high-grade general obligation sector, with $1.2 billion on tap. This week the states of California, Georgia, Louisiana and Pennsylvania will sell debt. The large supply of high-grades, coupled with the uncertainty in the Treasury area, has caused high-grade rates to rise. Consequently, high-grade general obligation bonds are cheap compared with single-A rated housing, hospital and electric revenue bonds. Due to certain buying quirks in the market, the cheapest area of the high-grade general obligation market is in the 15- to 18-year area.

There are also some good revenue issues scheduled for this week. One is the Chicago-O'Hare airport issue that will probably carry a rating slightly above A. In the revenue world, 20-year maturities seem to offer the best values.

As long as the federal funds rate stays above 9 percent, buyers of municipals should have attractive selections available.