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Goldman’s Hatzius: The market is probably underpricing a Fed rate hike

Look out, market watchers. The Federal Reserve may raise rates sometime this year, possibly catching the market off guard, Goldman Sachs' chief economist, Jan Hatzius, said Friday.

"We think they probably are underpricing [the chances of a rate hike]" Hatzius told CNBC's "Squawk on the Street."

"We have a 25 percent probability for a hike at the September meeting. So, we don't think it's going to happen but it's possible. Then, we've got 40 percent for the December meeting," he said.

According to the CME Group's FedWatch tool, market expectations for a rate increase in September held at 6 percent, and are just 22 percent for December.

Jan Hatzius
Jonathan Fickies | Bloomberg | Getty Images
Jan Hatzius

Hatzius made his remarks after the Bureau of Labor Statistics reported U.S. payrolls grew by 287,000 in June, well above Reuters' consensus estimate of 175,000. That said, the already-weak May number was revised down to a gain of 11,000 from 38,000.

However, Art Cashin, UBS director of floor operations at the NYSE, said Friday that investors need to look at more data before assessing the strength of the U.S. labor market.

"Two months in a row look like a random number generator," Cashin said in another "Squawk on the Street" interview. "I think you're going to have to wait for other economic data to see if it begins to corroborate what's going on."

U.S. stocks surged on the heels of the jobs report. The Dow Jones industrial average rose more than 200 points, while the S&P 500 and the Nasdaq composite both gained more than 1 percent.