The market has likely fallen behind the curve when it comes to anticipating the Federal Reserve's pace of interest rate hikes this year, Bank of America Merrill Lynch senior economist Michael Hanson said Monday.
That is particularly the case if the U.S. unemployment rate continues to fall, he said. On Friday, government data showed the unemployment rate ticked down from 5 percent to 4.9 percent.
At the same time, wage growth and hours worked picked up, raising the specter of a tighter labor market in which employers need to pay more to attract workers.
For that reason, the Fed may raise rates more than the market suspects, and it may hike as soon as June, Hanson told CNBC's "Squawk Box."
"Unless we've had productivity absolutely collapse to the point where you basically have a tightening labor market and no growth, I suspect what you're going to see is very gradual improvement in the economy across a range of fronts that will be supportive for the idea that inflation is going to pick up very gradually," he said.
The Fed's inflation target is 2 percent. Consumer prices rose by 0.7 percent year over year in December.
A gradual increase in inflation means the Fed will likely hike rates by 25 basis points two or three times in 2016, more than the market is expecting, but not enough to tip the U.S. economy into recession, he said.
"Seventy-five basis points is not going to throw the economy into recession. Typically to have a recession you need very aggressive Fed rate hiking. You need an oil shock," he said.
Fed Chair Janet Yellen testifies before Congress on Wednesday, but Hanson said market watchers shouldn't expect her to give many clues about the Fed's future monetary policy.
The mixed jobs report, which saw the pace of job creation slow, and an 8 percent decline in oil prices last week sent stocks reeling on Friday. The Dow was set to open sharply lower on Monday as growth concerns persist.
UBS is a "cautious buyer" at this point because it does not believe current stock market conditions mark the start of a bear market, but one of a number of deep corrections, Julian Emanuel, the bank's executive director for U.S. equity and derivatives strategy, said Monday.
To be sure, 2016 started with the intensification of China's slowdown, Fed uncertainty and falling crude prices, he said. Add in geopolitical tension and politicians beating the drum about how bad the economy is on the presidential campaign trail, and it's a wonder consumer confidence remains as high as it is, he added.
Emanuel acknowledged that stocks have correlated so closely to the ongoing rout in crude oil prices that many investors are calling the market "uninvestable." The catalyst for a turnaround and the return of risk appetite might simply be the passage of time and the steadying of prices, he added.
As for the underperformance of the S&P 500 technology sector — it sold off on Friday and has now shed $529 billion in 2016 — Emanuel said that is more evocative of the latter stages of a correction than the start of a bear market.
"All the sectors — the cyclical sectors, energy, etc. — were sold off last year and now you're selling off the last men standing," he said.