Federal Reserve Chairman Alan Greenspan, stung by the bond market's recent displeasure with a cut in short-term interest rates, yesterday defended the central bank's monetary policy as a necessary step to encourage banks to make new loans -- and not a sign that the Fed has gone soft on inflation.

Greenspan told a House Banking subcommittee that over the past three years, the Fed has slowed growth of the money supply to the point that it soon will be "consistent with long-term price stability. ..."

"I see nothing in the actions we have taken in recent days which in any way alters our particular policy path," Greenspan declared. "Look at what we are doing. I mean, it's not an accident that money supply {growth} has come down."

Even as Greenspan spoke, the Labor Department provided fresh evidence that the battle for stable prices is far from won.

According to the report on employer labor costs, private industry workers' compensation, including pay and fringe benefits, rose 5.2 percent in the 12 months ended in June, up from 4.5 percent for the previous year. Wages and salaries alone rose 4.5 percent compared to 4.1 percent in the previous year.

Since labor costs represent about two-thirds of total business costs, pay increases usually cause employers to try to raise prices, unless the higher pay is offset by productivity gains. Greenspan and some other Fed officials pay particularly close attention to this employment cost index as a guide to inflation pressures within the U.S. economy.

Greenspan acknowledged yesterday that, as a result of the Fed's effort to reduce inflation, U.S. economic growth lately has been sluggish at best. "It really is quite soft, as we have seen in the last six months," he conceded.

At the same time, none of the traditional signals of an imminent recession are flashing, Greenspan said, noting in particular that there has been no buildup of unsold goods on business shelves that could lead to cuts in orders, production and employment.

Many financial analysts were waiting for Greenspan's testimony yesterday in hopes he would clarify current monetary policy. After the Fed cut a key interest rate by a quarter of a percentage point earlier this month, Greenspan had explained that the move was for the limited purpose of offsetting the impact of a reduction of the willingness by banks to lend even to creditworthy customers.

Unluckily for Greenspan, he offered his explanation last week on the same day the Labor Department reported that consumer prices rose 0.5 percent in June, and investors grew worried the Fed has become less willing to take the steps needed to bring down inflation. Those fears translated into higher interest rates for long-term bonds.

Elliott Platt, director of economic research at Donaldson, Lufkin & Jenrette, said Greenspan's comments yesterday should help to ease market anxieties. "It took away from any negatives he created when he seemed to be wavering," Platt said. At the end of day, the bellwether long-term Treasury bond was down a quarter point, or $2.50 for each $1,000 in face amount. Its yield, which rises when the bond's price falls, edged up to 8.57 percent from 8.55 percent.

As evidence the Fed has put the economy on a track toward lower inflation, Greenspan reminded lawmakers yesterday that the rate of growth in debt taken on by businesses, individuals and government, excluding banks, is at its lowest level in two decades. Similarly, the key money supply measure, he added, is growing at the slowest pace in three decades.