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.

The report also confirms that inflationary pressures eased. The fixed-weight price measure and the implicit price deflator were both up 2.6% after rising 3.5% and 3.3%, respectively, during the first three months of the year.

Samuel Kahan, chief economist for Fuji Securities Inc., said the GDP figures gave the bond market less reason to worry about a move by the Fed to raise short-term rates, which Greenspan said is inevitable at some point. "The marketplace had anticipated a Fed tightening and is now re-evaluating that situation," Kahan said.

"I think it's a significant event when you can see growth is below the Fed chairman's expectations," said Bill Cohen, vice president for Lehman Brothers. He noted that the bond market, which rallied yesterday, has recovered most of the losses it racked up after Greenspan's testimony last week to Congress.

Rep. Henry Gonzalez, D-Tex., chairman of the House Banking Committee, blasted Greenspan for talking of higher rates when the economic data remain lackluster. Gonzalez noted that at one point Greenspan said he believed the economy is growing close to 3% a year.

"The Federal Reserve is supposed to be champion number crunchers, but the only thing they, seem to be crunching is the economy," said Gonzalez. "A revised monetary policy is clearly needed."

Commerce Secretary Ronald Brown said the GDP report "confirms that our economy is growing steadily, but slowly." But Brown conceded the report reflected "anemic growth that will not produce the jobs we need," and urged Congress to act promptly to pass the President's deficit reduction package.

According to the Commerce Department figures, business inventories swelled by $8.2 billion in the second quarter, a much slower rate of accumulation compared with the $33.5 billion gain in the first quarter. The total GDP was reduced by the difference, or $25.3 billion.

However, some analysts were optimistic that businesses have largely completed their drawdown of inventories and will start stepping up production in the second half.

"In essence, the largely unwanted and unanticipated accumulation of stocks has been worked off," said Gordon Richards, an economist with the National Association of Manufacturers.

Other elements in the report suggested the economy is far from wobbly and could grow around 3% in the second half, analysts said. Real final sales, a measure of demand that excludes inventories, shot up 3.7% after dropping 1.2% in the first quarter.

Personal spending, which accounts for two-thirds of GDP, was up a healthy 3.8% after a meager gain of 0.8% in the first quarter as consumers stepped up purchases of autos and other durable goods.

Business spending on plant and equipment was also strong, jumping 13.3% after an almost equally big gain of 13.1 % in the first quarter. Investment was concentrated in producers' durable equipment.

The only major sector of the economy that was weak was residential investment, but housing analysts said low rates will continue to boost mortgage refinancings and home sales during the rest of the year.

"It's essentially a repeat of 1992 when we had slow reported growth in the first half and fairly robust growth in the second half." said Thomas Carpenter, chief economist for ASB Capital Management Inc.

"The testimony from the Fed chairman suggesting that a zero real federal funds rate cannot persist much longer is still true, I think," said Carpenter, who expects to see short-term rates raised 25 or perhaps 50 basis points over the next nine months. Still, he suggested, the Fed's tough stance could keep long-term rates from rising and may actually foster a slight decline if inflationary expectations remain subdued.

"You can make a case for an economy that's in reasonably good shape, not great," said Robert Dieli, vice president for Northern Trust Co., in Chicago. But he added that he does not expect Fed officials to raise rates this year.

"We are in the talking phase, but we are some distance removed from when the actual implementation of policy is needed," Dieli said. "I don't think Fed policymakers have it explicitly in mind to raise the federal funds rate anytime soon, but they want the market to know they're thinking about it."

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