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A government shutdown wouldn't be a huge market or economic event: Analyst

Key Points
  • The issue with a government shutdown is investors will interpret it as a sign that Republicans are unable to govern, James Pethokoukis said.
  • He believes the failure to raise the debt ceiling is a huge market event, although he puts the chances of that happening at "close to zero."
Investors see current struggle as Republicans' inability to govern: AEI's Jim Pethokoukis

A government shutdown will not be a huge market or economic event, but it will have political repercussions, the American Enterprise Institute's James Pethokoukis told CNBC on Wednesday.

"The issue is that investors interpret this as a sign that Republicans are unable to govern because obviously it's coming at almost the exact same time as the debt ceiling fight, which … indeed is a huge market event," the economic policy analyst for the conservative think tank said in an interview with "Closing Bell."

The US Capitol
Saul Loeb | AFP | Getty Images

Stocks fell on Wednesday after President Donald Trump said the United States will build a wall along the Mexican border even if it means shutting down the government.

If Congress does not reach a funding deal that the president signs into law by a Sept. 30 deadline, the government will shut down. Lawmakers are also facing a vote to increase the borrowing limit by the end of September.

Senate Majority Leader Mitch McConnell said on Monday there is "zero chance" the U.S. won't raise the debt ceiling.

"America's not going to default," he said at an event in Kentucky.

Meanwhile, the last government shutdown, in 2013, lasted about 2.5 weeks and did not have a big impact on the economy, according to Michael Feroli, chief U.S. economist at JPMorgan.

However, he said a failure on the debt ceiling may be a different story.

"We've never had the debt ceiling go past its drop-dead date, so it could potentially be quite disastrous for the economy," he told "Closing Bell," pointing out that it depends on how long it goes on.

While he doesn't think it's going to be an issue, he said, people need to keep it in mind.

Pethokoukis also isn't betting on a government default, putting the chances of Congress not hiking the debt limit to "pretty darn close to zero."

However, he said a government shutdown for a small amount of time is likely and he wouldn't be surprised by a temporary resolution on funding or the debt ceiling.

— CNBC's Jacob Pramuk contributed to this report.