Janet Yellen's Treasury braces for 'hard choices' if debt-limit talks fail

The debt-limit stalemate is poised to be a career-defining test for Treasury Secretary Janet Yellen and her team of seasoned bureaucrats, who in as little as 10 days may be forced to take unprecedented steps to avert a global meltdown.

Yellen — an economist and former Federal Reserve chair — has emerged, by design, as the Biden administration's most-trusted messenger to Wall Street and to even senior Republicans on the timing and consequences of a potential debt default. Asked last week if he questioned her June 1 projection for when the government could run short of cash, House Speaker Kevin McCarthy told reporters: "No. Whatever Janet Yellen says is the date."

Now Yellen is signaling that Treasury will have to take on an even more critical and fraught role — sorting out, at President Joe Biden’s direction, which of the government's bills to pay in the event it doesn't have the money to cover all its obligations.

So-called payment prioritization, which officials have studied and gamed out but never used in practice, could allow the U.S. to avoid defaulting on its debt — the financial instruments that serve as the lifeblood of global markets. But it would require policymakers to potentially delay money sent to other individuals and businesses.

"There will be hard choices to make about what bills go unpaid," Yellen said Sunday on NBC's "Meet the Press."

It's a political position that current and former administration officials say Treasury's key debt-limit players have long avoided.

"What's underappreciated is the apolitical role of the Treasury Department," said Ben Harris, who recently stepped down as the department's chief economist. "A lot of the people who are engaged in these discussions are career civil servants whose only real interest is the health of the financial system.”

Yellen at arm's length

Yellen isn't at the negotiating table with House Republicans on a debt-ceiling deal. But she is coordinating with the White House at a senior level, with several meetings between the department and the White House happening weekly, according to administration officials.

The White House is taking a somewhat arms-length approach to how Treasury goes about its work. The two operate closely on messaging, but one White House official said the intention is for Treasury to be seen as having a degree of independence. That’s so Yellen’s default warnings are taken seriously and so the “X-date” — the projection of when the government will be unable to pay all its bills — doesn’t become politicized.

Inside the building, Yellen and Deputy Secretary Wally Adeyemo are on a daily call with the Treasury office that tracks developments in global trading, known as the markets room, a Treasury spokesperson said. Yellen has been getting a daily briefing on the X-date forecast for the last few months.

Yellen's team

Yellen is backed up by a group of lesser-known officials who each bring decades of government and financial policy experience to the challenge of navigating what she calls a potential "economic and financial storm."

Treasury fiscal assistant secretary David Lebryk, the highest-ranking career official at the department, is responsible for financing the government’s operations and overseeing the forecast of when it will run out of cash. Lebryk, who has Harvard degrees in economics and public administration, joined Treasury as an intern in 1989. In addition to determining the X-date, his group would also play an important role in any potential payment prioritization after the deadline.

Assistant secretary for financial markets Joshua Frost, a political appointee confirmed by the Senate about a year ago, is tasked with understanding how the market is reacting – including bank executives and credit-rating services. He spent more than two decades at the Federal Reserve Bank of New York. Like Lebryk, he reports to Under Secretary for Domestic Finance Nellie Liang, another Fed veteran.

Treasury is also part of the administration’s review of debt-limit-related legal questions, including the potential invocation of the Constitution's 14th Amendment. Key players on Treasury’s legal team include general counsel Neil MacBride and principal deputy general counsel Laurie Schaffer, who earlier served at the Fed. Treasury’s main liaison to Capitol Hill is assistant secretary for legislative affairs Jonathan Davidson, a long-time congressional aide who was previously chief of staff to Sen. Michael Bennet (D-Colo.).

“For the average American, you could plop them down in a discussion at the Treasury Department and you wouldn’t hear discussions about Democrats and Republicans,” Harris said. “You would hear discussions about avoiding recessions and keeping credit markets well-functioning. It’s a very technocratic discussion, where the primary concern is around the full faith and credit of the United States. It’s not over which political party will come out ahead.”