This is expected. Engagement programs don't automatically take leads out of the engagement program because of hard bounces or for any other reason. You need to build campaigns to execute against leads in engagement programs. EG. If hard bounce then remove from engagement program.
As Jim mentioned, there is no automation exclusion of bounce backs in MKTO. You will have to create a logic for this. Another thing I would suggest to do is review all your hard-bounces and try to identify the reasons behind why they have bounced and solve it. That way you can have a healthier database, improve your deliverability rate and the performance of your Engagement Programs.
Hope this helps you!