Robert J. Genetski of Harris Bank in Chicago, like many monetarist economists, uses changes in the money supply as the key variable in predicting the course of the American economy. On the basis of money growth at close to an 11 percent annual rate in the first half of this year, Genetski says the economy is about to take off again.

Since the middle of 1984, the gross national product, adjusted for inflation, has risen only 2 1/4 percent. Among other consequences, the civilian unemployment rate in June was 7.3 percent, unchanged from the previous month and slightly higher than a year earlier.

Genetski expects real GNP to increase at a 6 percent rate this quarter, followed by a solid 5 percent rate in the final three months of the year. "While the relationship between money growth and the economy is not automatic, it would be extremely unusual for spending to remain sluggish," he says in his latest forecast.

Unfortunately for the Federal Reserve policy makers who will be meeting this week to reaffirm or change their money growth targets for this year and to set tentative ones for 1985, "extremely unusual," or at least "unusual," may be the appropriate words to describe a situation in which a soaring trade deficit is holding down U.S. economic growth.

M1 growth is far above the Fed's 4 to 7 percent target range for the period from the fourth quarter of 1984 to the fourth quarter of this year. Economic growth, on the other hand, has been well below what Fed policy makers had expected.

Specifically, the policy-making group, the Federal Open Market Committee, or FOMC, must decide what to do about the above-target money growth. In the process, they also will decide whether to seek lower short-term interest rates to try to boost economic growth or to give the rate reductions of this spring more time to have an impact.

Few, if any, financial analysts expect the FOMC to try to rein in money growth by increasing rates. At the same time, however, analysts do expect rates to rise later this year if the economy picks up.

The current dilemma is that money growth accelerated beginning last November and, with a lag of a quarter or so, should have begun to have a very substantial impact on current-dollar GNP. It has not. (See chart)

As Genetski puts it, "Although GNP for the second quarter rose faster than in the first quarter, it is 2 1/2 to 3 percentage points slower than would have been expected on the basis of prior money growth.

"This suggests that the preliminary data will be revised upward, or that the lag between faster money and a spurt in spending is longer than the average, or, finally, that money is not having a stimulative impact on spending. Our forecast rejects the final explanation by indicating a strong rate of growth through the balance of the year," he explains.

Asked whether the economy will speed up significantly in this half of the year, Fed Vice Chairman Preston Martin replied, "That's a consummation to be devoutly wished. I wish I was that optimistic or that much of a monetarist. The evidence is just not that convincing . . . I wonder how these fellows handle net exports. That's the thing that is throwing off" the link between money and the economy.

Another equally fundamental problem is that M1, the most closely watched measure of money, doesn't have quite the same characterists that it once did. Only a few years ago, M1 consisted entirely of currency in circulation and checking account deposits at commercial banks. Then came financial deregulation.

Now M1 also includes travelers checks in circulation, a minor item, and a major one called "other checkable deposits." The latter covers NOW accounts at all financial institutions, credit union share draft balances and demand deposits at thrift institutions, and in May represented 27 percent of M1. Before the year is out, "other checkable deposits" likely will be a larger component of M1 than currency and will be nearly two-thirds the size of checking account deposits at commercial banks.

The importance of this relative shift among the components of M1 is that the institutions holding those "other checkable deposits" pay interest on them. No one pays interest on the currency in the nation's pocketbooks, and banks are barred by law from paying interest on checking accounts.

If an individual uses a NOW account as a savings vehicle rather than simply as an interest-bearing checking account, then M1 is no longer an accurate measure of "transactions balances" -- money that is cash or virtually cash and that can be spent at any time -- as it was deemed to be in the past.

In the six months between November and May, the currency and commercial bank checking account deposit components of M1 rose at 6.7 percent and 7.4 percent rates respectively. The other checkable deposits component rose at a 19.5 percent rate.

Against such a background, what's a policy maker to do? Two years ago, faced with a surge in money growth, the FOMC decided to let bygones be bygones. Rather than try to reduce M1 growth very sharply in the second half of the year and get it back within its target range, the FOMC rebased its target by measuring M1 growth from its second-quarter average level rather than from the fourth quarter of 1982. In other words, the Fed incorporated the money surge into the base.

That is one option for the policy makers this time around, and one some financial analysts think would be the best approach.

"They should tell everyone that they assumed that M1 velocity would rise at a 2 percent or 2 1/2 percent rate and it just didn't happen," advises William C. Melton, senior economist at Investors Diversified Services in Minneapolis.

"The Fed has credibility in making technical adjustments. If you've got it, you ought to use it," Melton says, adding that the alternative, tolerating the "over-shoot," would "call the whole targeting approach into question."

Melton also suggests that along with the rebasing, the FOMC ought to widen the target range for M1 by a percentage point or more, making it, say, 5 to 8 percent instead of 4 to 7 percent. "But it would be even better if it were 3 1/2 percent to 8 1/2 percent," he says.

Vice Chairman Martin won't say how he would like to resolve the M1 dilemma, but it is clear that he does not favor trying to bring it back within its current target range. "It seems to me there has to be confirmation" that M1 growth indicates much faster economic growth.

"When I see M1 behaving in a way that is at odds with history, with the other [monetary] aggregates and the economy, I have to regard it less seriously."

Another FOMC member is more confident than Martin that economic growth will speed up this fall. The official cautions, however, "The expansion is getting old and, as it gets old, the exposure to accidents increases . . .

"The substantive question [about the money targets] is, Is there something in the behavior of M1 that means it should be disregarded as it was in 1983?" the official says. "There are not many here who take a pure monetarist position on that. The PR issue, once we've decided on the substance, is how do we present it."

The FOMC member continued, "There are conflicting signals [from the economy]. Money growth has been strong from some months, and we ought to be seeing more of an impact. It's hard to find signs of it. That's the issue."

One of the problems facing the policy makers, says another Fed official, is that there is a major difference between the current situation and that of mid-1983. Then unemployment was 9 percent, and there was much more room for the economy to tolerate very rapid economic growth without adding to inflation, the official notes.

Another point the FOMC members will have in mind is that the value of the U.S. dollar on foreign exchange markets has stopped rising. "That takes away some of your price gains and will be felt over time. In a sense, that's an argument that interest rates will go up," the official says.

Interest rates have declined several percentage points in the last year, and the decline in rates is undoubtedly part of the reason why the velocity of M1 -- the rate at which money circulates in the economy -- has dropped this year. As rates move lower, the cost is also lower to a household or business holding assets in the form of cash or non-interest-bearing checking accounts.

The argument also holds concerning the other checkable deposits component of M1, on which there is still an interest rate ceiling. Lower market rates mean there is less of a penalty associated with holding money in the more convenient form of a NOW or similar account.

But Vice Chairman Martin notes that the rate declines from last year, by themselves, do not seem to be large enough to explain satisfactorily the drop in M1 velocity in the first half of this year. The drop in the first quarter was at a 4.3 percent rate, compared with a long-term upward trend in velocity of between 2 1/2 and 3 percent.

But then in the second quarter, velocity dropped by nearly as much as it did in the fourth quarter of 1982, with both at more than a 15 percent rate.

Martin believes that the declines in interest rates during the second quarter also will hold down velocity during the remainder of the year.

In any event, the latest economic statistics do not resolve the issue one way or the other. The figures released Friday by the Labor Department show that the index of aggregate weekly hours worked rose only 0.3 percent in June. The figures for manufacturing alone indicate that there was probably little, if any, increase in industrial production last month.

Before the employment numbers were released, economist Alan Greenspan of Townsend-Greenspan & Co., told his clients, "The latest available evidence indicates that the pattern of sluggish economic activity continued during May and into June . . . weekly industrial production indicators are little changed from their May level, and retail sales, dragged down by weak new car purchases, probably rose only marginally."

Continued Greenspan, "Periods of slow but positive growth cannot endure indefinitely. We continue to view a reacceleration in growth as the most likely next phase, but we are at a critical point in time. If evidence of cumulative contraction does not materialize in the next four to eight weeks, time appears to be on the side of the forces for renewed growth."

But as always, policy makers at the Federal Reserve must make a decision now, not in four to eight weeks.