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Here we go again? More confusion on Fed and rates

Betting on the Federal Reserve finally getting around to normalizing policy and raising interest rates hasn't been a particularly effective strategy.

However, some on Wall Street finally seem ready to cast doubts aside.

On the heels of notes from the last Federal Open Market Committee meeting, Bank of America Merrill Lynch said the stage has been set for the first hike since the central bank last tightened in mid-2006.

Given market reaction to the October statement, "we think that it is no longer necessary to hedge against rate hiking risk into year-end," credit strategist Hans Mikkelsen said in a note to clients.

"The market has spoken: The Fed is free to start hiking rates in December," he added.

Read MoreFed leaves itself a little room — just in case

Mikkelsen places his faith in a December hike in a stock market that rallied sharply after the release of the October FOMC minutes. The S&P 500 jumped about 1.5 percent Wednesday and has been higher since the meeting. Rate-sensitive sectors, including energy, materials and financials, have paced the index during the period after the Oct. 27-28 meeting.

"That suggests a belief in the market that the Fed is going to be able to start hiking rates in December without much negative impact on the U.S. economy, as well as crucially without crushing commodities, oil and the global economy," he wrote.

"This surprisingly strong performance no doubt is supported by signs that global manufacturing activity rebounded somewhat in October from the September lows. Clearly seeing indicators of global economic performance pointing up and not down provides better cushion for the Fed to start hiking interest rates in December."

Of course, markets, as if on cue, turned substantially less decisive Thursday.

Stocks meandered while the dollar got slammed against a number of its global peers, something that should not happen in a rising rate environment. Traders in the fed funds futures market have been back-and-forth, taking the probability of a December hike as low as 64 percent to as high as 74 percent, with the most recent level at 72 percent.

Read MoreFed's Lockhart: 'Comfortable' with hiking 'soon'

While there's widespread agreement that the Fed will want to move slowly, the timing remains in dispute. Fed officials largely have dismissed the importance of timing, but the hesitance all year indicates there is nervousness over getting it right.

While the October minutes reflected a stronger sense that December is the target date, they also showed a substantial level of disagreement about the path ahead.

"The battle between hawks and doves on the FOMC has only intensified and has no resolution in sight," Doug Roberts, chief investment strategist at Channel Capital Research, wrote, adding, "In essence, the financial markets are in a state of purgatory."

Roberts is less sanguine about the future for stocks than others on Wall Street who believe the fourth-quarter rally can be maintained even as the Fed hikes. The S&P 500 is up 8.5 percent for the quarter but just slightly positive for November.

"It remains to be seen if the recovery from the recent correction is just a bounce in an extremely volatile trading range or something more," he said. "However, if it is merely a bounce, the recent correction has the potential to turn into something more severe, especially if the Fed is tightening as the economy is weakening."