Whatever the Fed does Thursday will surprise someone, but not taking action could result in the least favorable course for markets since it will prolong the uncertainty.
The drama around this week's central bank meeting is unprecedented in recent memory, and the markets are not pricing in what could be the first rate hike in more than nine years. But history shows global market response may have been better when the Fed actually did hike rates when the rate rise was not expected by markets.
"If the Fed decides to tighten monetary policy, even if it is Thursday, there is a chance they can lower the range of uncertainty on future monetary policy. That may be the best for the U.S. economy. It may not be the best for the world, but it would be best for the U.S.," said Steven Wieting, global chief strategist at Citi Private Bank.
Wieting looked at the reaction in emerging markets, which have been very sensitive to anticipation of a Fed rate hike and the rising dollar. He also used the Mexican peso as a representative for emerging market currencies.
Citigroup found at times when the fed funds futures were anticipating a Fed rate increase, but the central bank did not act, emerging markets equities were weaker a month later on 5 of 6 occasions. Emerging stock markets, as defined by the MSCI EM index, were 11 percent higher a month later in the summer of 1994, but in the five other occurrences, the markets were down between about 1 and 10.8 percent.
"Those cases where the Fed didn't tighten turned out to be worse news for markets. That's particularly when you look at the month later ... I was looking at this through the lens of emerging markets which is in the cross hairs of the current issues," he said.
Conversely, Wieting found two instances where the futures did not anticipate a rate rise, and after a surprise hike, the MSCI EM index rallied an average 8 percent within the next month.
"I would argue given the severe weakening we've seen in many emerging markets there will be an initial relief in emerging markets if the Fed decides not to tighten," he said. There will also be a reaction if it does tighten. But Wieting warns history shows the Fed lack of action could have a longer-term impact.
"Because we're priced for this straddling possibility, there will be a reaction. Money markets are priced for zero. They're not priced for 25 basis points," he said.
U.S. stocks had a different reaction, according to analytics firm Kensho. On eight occurences where the market anticipated a rate hike that never materialized, the S&P 500 was up 75 percent of the time with an average return of 1.89 percent 30 days later, with a much flatter response the day of the announcement. Gold and the dollar index were negative across both time periods.
A number of strategists say the Fed should move to remove the uncertainty that has been hanging over markets.
"Let's get it out of the way. I think uncertainty is hurting stocks more than an actual rate increase, and I'm in favor of a rate increase," said Wharton professor Jeremy Siegel. "We're not just going to get an on/off rate increase or not. At 2 o'clock on Thursday, we're going to get a statement about the intentions of perhaps further increases or not." He said when the Fed provides its forecasts for interest rates, it could be more dovish than it currently is for next year.
"I think we could have a stock market rally even though ... so many people are really appearing doom and gloom about a rate increase," he said.
Wieting's data showed the fed funds futures had priced in the probability of a rate hike at just 8 percent in November 2005, and the emerging market market index rallied 1.5 percent on the day of the announcement, and was 8.4 percent higher a month later. In the other case, where market expectations were 24 percent priced in, the emerging market index fell by a half percent on the first day, April 18, 1994, but then rose 7.6 percent in the next month. The market is currently pricing in just under a 30 percent chance of a rate hike Thursday.
"I worry about stocks if they don't go and they keep this uncertainty lingering ... by not going but leaving the potential out there, you have lingering uncertainty," said John Briggs, head of strategy at RBS. "A hike with very dovish commentary ... creates more clarity."
Of course, in the Citi historic data, events that were driving emerging markets lower could have encouraged the Fed to stay on hold, and the question now is whether the emerging market meltdown could cause the central bank to pause.
"I think it's too early to be a bottom fisher. There are people who want to bottom fish in things like energy. Energy still has a lot of problems as long as there's continued uncertainty about what the Fed is going to do," said Richard Bernstein, chief executive officer and chief investment officer at Richard Bernstein Advisors. "Even if they raise rates, you're going to have the guessing game."
Bernstein said the markets could continue to be volatile as long as the Fed's intentions are unclear.
"If they do continue tor raise rates and there's continued uncertainty and the profitability does not turn around, the volatility will continue," he said.
Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.