Among the many nostrums associated with "supply-side" economics is the idea that monetary policy can be relied upon to fight inflation while fiscal policy revitalizes the economy. Although everybody seems unhappy with the current record-high interest rates, they are likely to persist, or even rise, if this policy prescription is followed.

Since monetarism sometimes borders on mysticism, it is worth stating that there is no magical link between the growth of money and inflation, and no mystery about how monetary policy combats inflation. Tight money makes credit scarcer and more costly. This dissuades some would-be borrowers, reduces spending and costs some people their jobs. The slack that is created in product and labor markets slows the pace at which wages and prices a re rising. It's as simple as that.

But if fiscal policy is expanding demand at the same time that monetary policy is reining it in, the salutary effects of tight money on inflation may be dissipated. The resulting scramble for funds may send interest rates skyrocketing.

We have been fighting inflation with tight money for almost a year now, and the policy has shown results. Gains in the battle against inflation have come grudgingly and at great cost. But they have come. And they will continue to come if we stay the course.

But there is now a danger that we may overdo tight money, that the battle against inflation may degenerate into a holy war in which, as the infidels are driven from the temple, the temple itself is destroyed. One reason for this danger is the Federal Reserve's avowed intent to continue to worship at the altar of monetarism.

In a classic example of doing exactly the right thing at precisely the wrong time, the Fed converted to monetarism just as that doctrine became an anachronism. Monetarism is predicated on the notion that the path to salvation is paved with a constant growth rate of the money supply. A few years ago, before deregulation and rapid institutional change started changing the face of our financial system, monetarism may have made good sense. As long as we understood the demand for money, it made sense to appraise monetary policy (and perhaps even to run monetary policy) by looking at the supply of money.

But monetarism makes no sense at all in a world where financial innovations are changing the meanings of the various Ms right before our eyes. When deregulation and institutional changes are causing abrupt, unpredictable and largely unmeasured shifts in the demand for any of the Ms, it is virtually impossible to define a sensible target for the supply of M, however M is measured--although the Fed is not bashful about trying!

The framework for monetary policy that has been embraced by both the Fed and the administration --a gradual deceleration of the growth rate of money--may well have been the best way to disinflate in the 1960s or early 1970s. But it is virtually meaningless in the 1980s. Which is the M whose growth rate should be gradually reduced? And starting from what base? With the anticipated rapid changes in the demands for the various Ms, now could such a strategy be implemented, anyway? My answer to these questions is that there are no answers. In the current environment there is simply no way to define sensible deceleration strategy based on monetary growth rates.

Where, then, should the Fed look for guidance? The pilots of monetary policy should realize that their traditional instruments are malfunctioning and that their air traffic controllers are out on strike. Then they should open their eyes and take a look out the window at the earth below. Specifically, the Fed should try to look through the financial system and try to discern the effects of monetary policy on the real economy. It is not hard to know where to look, because certain sectors of the economy are far more sensitive to credit conditions than others. Tight money will not easily slow economic expansion in the computer or oil industries. But it will impact on the construction industry, the automobile industry and consumer installment purchases rather severely.

If we look at these credit-sensitive sectors, what do we see? The latest data show housing starts in 1981 running at roughly the same levels as 1980, which was a disastrous year for housing. The travails of the auto industry are probably too well known to bear repeating. Although the comparative strength of foreign car sales suggests that not all of Detroit's problems are made at the Federal Reserve, there can be little doubt that high interest rates have hurt badly. Extensions of consumer credit (net of repayments) for purposes other than buying cars are actually running below the incredibly low rates of 1980. All in all, the heavy imprint of tight money in the credit-sensitive sectors of our economy is unmistakable.

In sum, it is not necessary for monetary policy to fly on faulty instruments. It is possible, instead, to look through the various Ms and see the effects of money policy on the real economy directly. When we do that, our latest data will be a few months older than the money supply data, but little is lost here because the weekly supply data are utter nonsense and the monthly data are only slightly better.

If the Fed would start doing this today, it would see clearly that tight money is "biting" on the real economy to a significant extent right now, regardless of what the latest report on the money supply may show. It would probably also conclude that monetary stringency has not yet gotten out of control. Not yet.