The Federal Reserve, worried about what some officials regard as unusually high dangers associated with allowing slow economic growth to continue, apparently is continuing to ease monetary policy.

The easing is occurring even though the most closely watched measure of the money supply, M1, is far above target and is likely to stay there for some months to come. The major issue facing central bank policy makers at their next meeting July 9 will be whether to continue to ignore the M1 target, change it or still try to hit it, several Fed officials say.

Implicit in that choice probably will be a decision about whether the rapid rate of money growth will mean higher inflation in the future, or a willingness to accept that possibility because the alternatives -- such as more failures of U.S. financial institutions and companies or a Third World debt crisis -- would be worse.

Another important concern at the meeting will be the value of the U.S. dollar on foreign exchange markets.

"The key variable is when and by how much the exchange rate declines," says one senior Fed official, who does not believe economic growth will pick up very much until the dollar's value starts to fall and the international competitive position of American manufacturers improves.

Market participants are so certain about the immediate course of Fed policy toward easing that both short- and long-term interest rates fell sharply last week. The declines were large enough that rates ended the week at levels consistent with a Federal Reserve discount rate of 7 percent.

However, the rate, which the central bank charges on loans to financial institutions, remained at 7 1/2 percent. The Fed lowered it from 8 percent on May 17.

The key federal funds rate -- the interest rate institutions charge on loans of reserves to one another -- dropped to about 7 1/4 percent at the end of the week, and the Fed did not intervene in the market to boost the funds rate. Since the Fed normally keeps enough pressure on the availability of reserves to hold the funds rate above the discount rate, many market participants saw the failure to intervene as a strong sign the central bank was setting the stage for another discount rate cut.

Even if the discount rate cut does not come, many analysts believe the 10 percent prime lending rate at commercial banks will fall to 9 1/2 percent shortly, probably this week, as a result of a continuing drop in the banks' cost of obtaining funds to lend.

Some Federal Reserve policy makers are concerned about the possible inflationary consequences of a sustained rapid expansion of M1, the measure of money that includes currency in circulation and checking deposits at financial institutions. But more of them are worried about the potential consequences of slow economic growth.

In a New York speech recently, Fed Gov. Henry C. Wallich, a conservative who has dissented from policy decisions on more than a few occasions out of a concern about restraining inflation, described the central bank's dilemma this way:

"The current pace of inflation obviously is not good enough -- in a better age, it would have been regarded as unacceptable and would have brought about immediate strong action to curb it. Today, the state of the world makes it difficult to take substantial risks on a slowing of the economy . . . T he premium for the rest of the world of maintaining the pace of the U.S. economy is higher today than it ordinarily has been.

"Monetary policy, today more than usually, is beset by constraints on all sides," he said.

Wallich ticked off some of those constraints: the high value of the U.S. dollar in foreign exchange markets, unemployment, inflation, the fragility of financial markets, the situation of developing countries, problems of the farm sector and pressures on financial institutions.

"The dilemma is one familiar to economic policy makers: how to hit several targets with only one instrument," he said. "The job is made no easier by the fact that some of the targets conflict."

At the moment, with inflation showing only a few signs of accelerating, the Fed has clearly opted to focus on the other problems, both actual and potential, rather than inflation that might be generated in the future by the rapid growth of M1.

Federal Reserve Chairman Paul A. Volcker defended in a speech at Harvard University the May 17 discount rate cut against some criticism that it could be inflationary.

"There was . . . no inconsistency in my mind between a continuing priority concern about inflation and our recent decision to, in the jargon, 'ease money' by lowering the discount rate," he said. "That decision took place under particular circumstances -- a strong dollar, ample capacity, and slow economic growth, all of which tend to reduce inflationary pressures.

"The sensitivity of some to any action that could be interpreted as inflationary is an understandable, if mistaken, heritage of the absence of effective, consistent governmental policies to deal with inflation over the years," Volcker declared.

The Fed chairman must have had in mind such critics as Lawrence Kudlow, former chief economist of the Office of Management and Budget, who wrote after the May 17 rate cut, "The discount rate decision dovetails perfectly with the prevailing Washington view that monetary policy can have its cake and eat it, too. In other words, as this reasoning goes, faster money growth will stimulate the economy, but it will not stimulate inflation . . . .

"What policy makers seem to be forgetting is that more stimulus will not shorten the lag between changes in money growth and changes in economic growth," Kudlow continued. "Nothing done today can prevent the soft landing caused by last year's restraint from slow money growth . However, more stimulus now will intensify the future economic impact, causing an overshoot in nominal or current-dollar GNP and inflation."

Some of the policy makers clearly are hoping that, in money growth terms, they can have their cake and eat it, too, just as they did in late 1982 and the first half of 1983. At that time, monetarist economists warned that rapid M1 growth would generate higher inflation by early 1984. They turned out to be wrong because -- for reasons that are not fully clear but are probably related to the large decline in interest rates in the latter half of 1982 -- the public choose to increase its holdings of the highly liquid assets that make up M1 but not to increase comparably its spending for goods and services.

Will the monetarists be wrong again? The stage is being set for another test. M1 rose at a 13.6 percent annual rate in May and at a 10.4 percent rate over the last seven months. That compares with a Fed target for M1 growth of 4 percent to 7 percent from the fourth quarter of 1984 to the fourth quarter of this year.

In the week ended June 3, M1 stood at a level of $585.6 billion. If it grew not at all for the rest of the year, its fourth quarter average would still be above the mid-point of the Fed's target range.

At the July 9 meeting of the Fed's policymaking group, the Federal Open Market Committee, the issue of money growth will have to be met head on. The FOMC will have to reaffirm or change its target for 1985 and set a tentative target for 1986. Targets for two broader aggregates, M2 and M3, also much be reaffirmed, but they are currently near the mid-point of their respective ranges.

One senior Fed official, who admits to being very uncertain about what is happening in the economy this year, says the current signs "are not consistent with impending recession, but I can't look at the economy and think that robust growth is about to resume, either. Some people do, I know.

"What is more likely is moderate growth, a little bit better than that" of the last three quarters, the official says.

(The gross national product, adjusted for inflation, has increased at an annual rate of 2.2 percent since the middle of last year. The Commerce Department is scheduled to release its so-called flash estimate for the current quarter on Thursday.)

The fact that the economic recovery has "matured," with business investment in plant and equipment increasing at a slower pace, inventory investment not likely to be a stimulative factor, and with further increases in the trade deficit probable -- "all that takes away some of my concern about money growth," the official says.

A member of the FOMC, but currently a non-voting one, Edward G. Boehne, president of the Federal Reserve Bank of Philadelphia, expresses a similar view. "It's a kind of thing in one's gut," he says. "Are you building in future inflation with this money growth. It seems to be money growth versus everything else . . . "

Boehne says the decision about the money growth targets will be the "number one issue" at the FOMC meeting. As for himself, he adds, "I've reached no conclusion at all. I want to see what happens in the next month. I just don't know what is the best way to deal with it."

At the Richmond Federal Reserve Bank, president Robert P. Black, an economist who is perhaps the most monetarist of the members of the FOMC, is deeply concerned about the rapid growth of M1. According to the published policy record of the FOMC's March meeting, Black voted with the majority to seek 6 percent growth of M1 during the March-June period even though the aggregate was above target.

"I did not want to decelerate too fast," explains Black, and the short-term growth figure would have brought M1 back toward the target range. "As a general proposition, I take these targets very, very seriously, in tight-money or easy-money periods. Once outside the targets, there are no good options. . . I think money really means what it purports to mean."

Black and his newly named research director, Al Broadeus, expect economic growth to pick up as a result of the rise in M1 since last November. "If I am misjudging the economy, and it remains weak, then a downward adjustment in interest rates could be consistent with slower money growth" later this year, Broadeus says. "I think many people in the [Federal Reserve] system believe that's what's going on."

Other members of the FOMC clearly do feel that way. Gov. Martha Seger told a Washington audience last week that the central bank is not particularly worried by the rise in M1 because it has found in the last two years that tight adherence to the money growth targets is not necessary. Seger said the Fed is following a "very flexible" approach to money policy focusing on a number of economic and financial variables rather than money alone.

Meanwhile, Fed vice chairman Preston Martin has continued to argue that the Fed's best contribution to correcting some of the imbalances that are plaguing the economy is to make sure its growth continues.

"The Federal Reserve can contribute to dealing with the imbalances by guarding against the possibility that the economy might slip into an extended period of sluggish growth, as it has over the past nine months," said Martin in a speech last month.

The vice chairman some months ago began to warn that the M1 growth target might have to be disregarded to keep the economy moving forward.

Wallich, who returned last week from trips to the Far East and Europe, said that the principal concern with the bankers and other officials with whom he talked was the stability of the American financial structure. The spate of recent bank and thrift institution failures has worried them far more than the possibility that the Fed might tighten to bring money growth back within target, he said.

For now, the risks the FOMC most want to avoid seem to require letting M1 growth continue apace. The risk of more inflation still seems remote.

"I think we can get through this period without any significant increase in inflation" even if the value of the dollar begins to come down and economic growth picks up, says one Fed official confidently.

"It is also possible to blow it if we fail to recognize the threat," the official adds.