Stocks lost ground on Friday, with the S&P 500 (^GSPC 0.25%) down 0.2%, while the narrower, price-weighted Dow Jones Industrial Average (^DJI -0.28%) gained 0.1%. Still, with a very respectable 1.7% weekly gain, the S&P 500 managed to claw back most of last week's losses.

It's all about the rates
On Tuesday and Wednesday, the Federal Reserve's Federal Open Market Committee, or FOMC, will hold its rate-setting meeting. There is next to no chance of a change in interest rates, but investors will be watching closely for any indications regarding the Fed's quantitative easing (bond-buying) program, which is currently running at $85 billion per month. The market's perception is that QE has been a major contributing factor to the stock market's impressive rally since its March 2009 low; that perception is probably correct. As a result, any hint of an "early" withdrawal or reduction in QE could send jitters through the market.

The minutes of the FOMC's last meeting, which was held on March 19-20, showed that the Fed was preparing to taper its QE program as early as this summer -- much earlier than the markets had anticipated. However, some of the key economic data released subsequent to that meeting, including March employment data and last Friday's first-quarter GDP report, have not been encouraging. The U.S. economy added just 88,000 jobs to nonfarm payrolls in March -- too little to make any dent in the unemployment rate. As a result, the FOMC may have become more dove-ish since then.

Speaking of which, next Friday at 8:30 a.m. ET, the Bureau of Labor Statistics will release its April employment report. Last month, the unemployment rate stood at 7.6%; that's down significantly from its October 2009 high of 10%, but as the following graph shows, it remains higher than it has been in all but a few periods in the postwar era:

With the Fed having explicitly tied its rate-setting to the unemployment rate, that number has taken on additional prominence in the eyes of active market participants. Nonetheless, there are still a few investors here and there that still monitor company fundamentals. The earnings season continues, with just over half of the companies in the S&P 500 having reported their results for the first quarter. Among Dow components, health-care companies Pfizer and Merck will announce their results on Tuesday and Wednesday, respectively.