WASHINGTON -- Federal Reserve Chairman Alan Greenspan raised the possibility yesterday of a brief U.S. recession, but stressed the long-term health of the economy in terms that the financial markets took as a signal that no imminent cuts in interest rates were planned.
Commenting on an abrupt economic slowdown, which he called "very pronounced," Mr. Greenspan acknowledged that "as a consequence of the sluggish economic outlook, the probabilities, some of my colleagues have indicated, of a recession have edged up, as indeed one would expect."
But he went on to emphasize that the likelihood of a deep, lengthy recession lasting into 1996 and beyond had "decreased very significantly."
Mr. Greenspan spoke in Seattle at a conference of bankers.
Bond traders and financial analysts interpreted the comments by Mr. Greenspan as indicating an intention to stand pat on interest rates.
Traders had been expecting a cut in short-term interest rates, and sent bond prices down sharply yesterday.
Such expectations followed a recent string of unexpectedly weak economic indicators, including the announcement by the Labor Department on Friday that the economy shed 101,000 jobs in May.
Many traders and analysts predicted last week that the Fed would be forced to lower rates soon to stimulate an economy slowing too quickly.
But if Fed officials believe that the economy is poised to bounce back quickly from a temporary slowdown, they would be unlikely to cut rates, because it takes up to a year for the stimulus of lower rates to take hold.
The remarks by Mr. Greenspan yesterday were particularly noteworthy because he typically chooses his words carefully and does not use a word like recession lightly.
His comments were echoed yesterday afternoon by Alan S. Blinder, vice chairman of the Fed. Mr. Blinder said the odds of a recession had increased but remained fairly low.
"I do not expect a recession," he said in an interview by telephone. "Have recent numbers raised the probability of a recession? Yes, they have, but it is still very far from a high probability."
Mr. Blinder emphasized the vulnerability of the economy during the second and third quarters of this year, while stressing that he expected the economy to do better later on.
Both Mr. Greenspan and Mr. Blinder said the recent sluggishness in the U.S. economy was a result of companies choosing to slow their accumulation of inventories instead of ordering new goods.
Economists commonly define a recession as two or more consecutive quarters in which the total economic output shrinks.
So a slight dip in output in the second quarter and again in the third quarter could qualify as a recession in the eyes of professional economists like Mr. Blinder and Mr. Greenspan, even though such a downturn might not bring the wrenching increases in unemployment and other hardships that many Americans associate with a recession.
Mr. Greenspan said that a move by companies to slow their accumulation of inventories would be healthy for the economy in the long term.
If inventories had continued to build at a rapid pace, there would have been "a fairly high probability of a significant contraction later this year and next," Mr. Greenspan said yesterday.
But he also cautioned that the slowing of the buildup in inventory was still modest and likely to "proceed for some while."