WASHINGTON - Fears in the bond market that the Federal Reserve might tighten monetary policy faded yesterday after the Commerce Department reported that U.S. output rose only 1.6% in the second quarter.

The department's advance estimate for gross domestic product, while subject to two more revisions, was less than the gain of over 2.5% predicted last week by Federal Reserve Board Chairman Alan Greenspan. Analysts said the main reason was a smaller-than-expected rise in business inventories, which continued to discourage firms from stepping up production.

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