No one has claimed responsibility for the Monday evening attack, but Islamic State has carried out similar attacks in Baghdad and other cities as their hold on Mosul weakens.
The blast happened at 1600 UTC, a busy time in a business district of Baghdad.
Islamic State militants have suffered a string of defeats over the past two years, losing more than 60 percent of the territory they once held in the country. Iraqi forces, backed by the US-led international coalition, are now closing in on retaking Mosul, Iraq's second-largest city.
The militarized Federal Police say they are about 500 meters from al-Nuri mosque, where Islamic State leader Abu Bakr al-Baghdadi made a rare public appearance in July 2014, announcing a self-styled caliphate in Iraq and Syria.
The attack comes as U.S. President Donald Trump is to meet Monday with Iraqi Prime Minister Haider al-Abadi in Washington for talks that are likely to include the ongoing offensive to recapture the key northern city of Mosul from Islamic State militants.