In his first speech on the economy in months, Federal Reserve Chairman Alan Greenspan sounded considerably more cautious about recovery prospects than private forecasters and even fellow Fed policy makers, The Wall Street Journal reports today.

The economy shows signs of stabilizing but still faces significant risks before a sustainable recovery can begin, the central-bank chief said in San Francisco on Friday. The downbeat assessment suggests interest rates could remain at their low levels for a while rather than rising by June, as investors had expected. It also raises the odds the Fed will cut interest rates for a 12th time since January 2001 at its meeting on Jan. 29-30 — though a rate cut is by no means certain.

“Despite a number of encouraging signs of stabilization, it is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold,” Greenspan said. “Recent signals about the current course of the economy have turned from unremittingly negative … to a far more mixed set of signals recently. But I would emphasize that we continue to face significant risks in the near term.” Profits and business investment remain weak, and household spending could be damped by the recent rise in mortgage rates, possible increases in unemployment and the lingering effects of steep declines in stock wealth, he said.

Hopes of recovery have soared recently, thanks to such upbeat signals as a pickup in manufacturing orders and strong house and car sales. Those signs also sent long-term bond yields climbing sharply as investors concluded that the Fed, which slashed its target for the federal-funds rate to a 40-year low of 1.75% in December from 6.5% a year earlier, probably was finished easing and would start raising rates by June. Thefederal-funds rate is the interest charged for overnight loans between banks.

But Mr. Greenspan appeared concerned that much of the improvement resulted from temporary factors. The incentives that boosted car sales since have been scaled back; low mortgage rates that propelled housing purchases and refinancings have climbed along with bond yields; and low energy prices, which boosted purchasing power, have stopped falling. He acknowledged production is likely to be boosted soon by businesses rebuilding inventories, but “that impetus to activity will be short-lived unless the demand for goods and services itself starts to rise.”