"The Fed doesn't necessarily need to see that inflation is at 2 percent, but certainly on the glide path towards 2 percent. I would not be surprised to see markets trading off of it," said Mark Luschini, chief market strategist at Janney Montgomery.
Traders are watching the 8:30 a.m. ET release of the consumer price index closely, even though the central bank's preferred measure of inflation is the personal consumption expenditure inflation reading. The headline CPI is expected to increase 0.3 percent after rising 0.4 percent last month, and it is seen 0.2 percent higher when excluding food and energy.
"If we saw a number no weaker than the previous one, and hopefully stronger, that would help reinforce liftoff, and in my view, for September," said Luschini. He said if the number is weaker than expected, it would encourage the camp that sees the first rate hike in 2016.
Fed Chair Janet Yellen wrapped up her semiannual testimony on the economy before the Senate Banking Committee Thursday afternoon. She repeated that the central bank is getting closer to raising rates and the first hike could come this year, if the data support it.
Amherst Pierpont's chief economist, Stephen Stanley, said CPI will be important in the Fed's monitoring of data but not critical in determining whether it will hike.
"In any case, the main goal for Chair Yellen in this two-day round of testimony was to walk into the hearing rooms, tell the legislators that the Fed intends to start raising rates before the next time they will see her in this capacity (February 2016), and to escape with her head still on her shoulders. Mission accomplished. Now, FOMC members just have to sit back and watch the data unfold and decide when will be the appropriate time to begin what will be a very long process of policy normalization," he wrote in a note.
The core PCE is only running at about 1.4 percent on an annualized basis, shy of the Fed's goal of 2 percent inflation. The central bank has made it clear inflation needs to be heading toward 2 percent, not at 2 percent, for it to raise rates.
"On a year-to-date (YTD) basis, the core CPI is already running well above 2 percent and this trend should continue into June, which is expected to show a gain of 0.2 percent. This would mark the fifth month of the last six that the series has increased 0.2 percent or more," wrote Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. He blames the lag in PCE inflation on a different method than used in CPI for calculating medical care inflation.
Besides CPI, there are housing starts and building permits at 8:30 a.m. ET and consumer sentiment at 10 a.m.
Luschini said General Electric should be important because it is a bellwether with reach into global markets. So far, the earnings trend has been positive, with Google's better-than-expected results lifting its stock 10 percent in late trading Thursday. Netflix was up 18 percent Thursday after its Wednesday afternoon earnings.
"There's an upbeat tone. That's certainly helping to provide a little boost to equities prices," he said. "I was encouraged by what came out of the banks over the last couple of days." Citigroup topped expectations on the top and bottom line, and turned in its best profit in eight years.
Stocks rose amid the mostly good news on earnings. Goldman Sachs was in the minority, after its earnings disappointed, down due to a litigation charge.
Traders will also be looking overseas as the German Bundestag votes on the Greek bailout, approved by the Greece's parliament Wednesday. German Chancellor Angela Merkel holds her traditional summer news briefing before departing for a holiday.
There is also an appearance by Fed Vice Chairman Stanley Fischer at 10 a.m. at the U.S. Chamber of Commerce.