By Howard Schneider and David Lawder
WASHINGTON (Reuters) - The Federal Reserve was closely monitoring the Chinese equities selloff that shook world markets on Thursday, while U.S. lawmakers were uncharacteristically silent on a further deterioration in the value of the yuan currency.
Long-simmering tension over whether China manipulates its currency for trade advantage could heat up again, but the yuan's slide this week appeared driven by market doubts about Chinese economic growth, not active devaluation by Chinese officials.
China last year moved to let markets play a greater role in determining the yuan's value, a policy shift welcomed by the International Monetary Fund and others that have urged the world's second-largest economy to let its currency float more freely.
Analysts noted at a U.S. trade policy forum in Washington on Thursday that Chinese officials have been trying to keep the yuan from falling too fast. That would be the opposite of what would be expected in a "currency war" aimed at gaining an export advantage.
With the U.S. dollar continuing its strong rise, "one could argue that the manipulators have had no need to manipulate," C. Fred Bergsten, former head of the Peterson Institute for International Economics, said at the forum convened by the U.S. House of Representatives' tax and trade committee.
China allowed the biggest fall in the yuan in five months on Thursday, pressuring regional currencies and sending global stock markets tumbling as investors feared it would trigger competitive devaluations. Stocks in Shanghai <.SSEC> slid 7.3 percent before authorities halted trading for the second time this week.
The troubles in China could complicate the Fed's debate about how fast to hike interest rates, following the central bank's decision in December to begin a gradual tightening of monetary policy. But a second rate increase is not expected until at least March or April.
FED WATCHING: EVANS
The equities sell-off in Shanghai and slowdown in China may in the end have little impact on the overall course of the U.S. economic recovery, Fed policymakers said on Thursday.
"There's obviously more volatility in financial markets at the moment. How things will settle out is still a little unsure," Chicago Fed President Charles Evans told reporters after an appearance in Madison, Wisconsin.
"Because the U.S. economic fundamentals are still pretty good, that would be the important factor for our forecasts going forward ... We are going to be clearly monitoring the global situation."
The slide in Chinese and other foreign currencies against the dollar has already hurt U.S. exporters, and Evans said that events in China this week are another argument for the Fed to go slow.
The Fed worked through similar global market turmoil last summer when a market selloff in China triggered a fall in U.S. stocks, prompting the U.S. central bank to hold off on a widely anticipated rate hike at its September policy meeting.
There are "lingering concerns" within the Fed about China, particularly whether a slowdown there could impact U.S. economic growth and jobs or, more likely, pull down global inflation and keep the Fed from reaching its 2 percent inflation goal, according to the minutes from the Fed's December policy meeting, which were released this week.
On the currency front, the People's Bank of China has spent tens of billions of dollars of its foreign reserve holdings in recent months to bolster a falling yuan.
"Far from buying dollars, they've been selling dollars to keep their currencies from falling out of bed. So there's been a dramatic change," from the days when China accumulated reserves in what was perceived by some as an effort to cheapen the yuan, Bergsten said.
Legislation recently approved by the House would clamp down on trading partners' currency manipulation. The measure still has to be approved by the Senate. An aide to Senate Majority Leader Mitch McConnell on Thursday provided no timetable for a vote by that chamber.
Under the bill, the United States could block countries from U.S. trade deals and government procurement contracts if they are found to have kept their currencies artificially low in order to gain an unfair trading advantage.
(Additional reporting by Jason Lange in Raleigh, North Carolina and Lindsay Dunsmuir in Madison, Wisconsin; Editing by Kevin Drawbaugh and Paul Simao)
