But the results are mixed bag for U.S. markets, Paulsen said. If the unemployment rate continues to fall and wages keep rising while economic growth remains stagnant at roughly 2 percent, the Fed will be forced to raise rates, he said.
Last week, the Commerce Department reported that the economy grew at 0.7 percent in the last quarter, below expectations.
“That’s sort of a stagflation sort of Fed tightening, where they have weak growth but they have to raise rates in the face of rising wage pressures,” he said. “That would be bad.”
The Fed has indicated it intends to raise rates four times this year, but most market watchers have forecast the central bank would hike only once or twice. On Friday, the dollar strengthened, Treasurys sold off and stocks fell as the market mulled the possibility of a March interest rate hike.
Lindsey Piegza, Stifel Fixed Income chief economist, called the report disappointing.
But because job gains remained on pace with those prior to the Fed’s rate hike in December, the central bank will likely continue to raise rates, despite weakness in retail and business spending and productivity, she said.
“I think it’s very clear that the economy is not on sound footing, but from the Fed’s perspective, they seem to be ignoring the current slew of very disappointing trends in the economy, focusing instead on cherry picking the data and expectations of further growth longer term,” she told “Squawk on the Street.”