In the same boat you are!
So I own an 03 jeep grand cherokee, Not too sure with the model transfer case. But it is mechanical, not electrical to change from 2wd to 4wd. I know for a fact it very well be the transfer case causing the issue, I have sunk soo much money i didnt have thinking it was wheel bearings, brake rotors, real axle seals and more!!
So i have been ripping my hair out and feeling embarrassed from the squeal noise. I have also experienced hard shifts (clunking shifts), changing transmission fluid or transfer case fluid did not do any better. Or even adjusting the TV kickdown cable.
4 months down the road, the squeal noise went away. Now it sounds like a knocking noise where the spare tire is supposed to sit. Sounds like someone keeps knocking saying let me out! lol but Acknowledging the rear differential, fluid is still good and no leaks as of today 1/13/2016. wheel bearings are good. etc. The only reason why i have not fixed mine yet is because lack of cash for the moment. I love my jeep to death and its a major BEAST. I wish to just DELETE the transfer case and TANK it in the trash. I have been doing research and more research trying to find options on if i can even remove the transfer case, find adapters and longer drive shaft. I cant find anything. Very stumped on this! I NEVER had to use 4wd even in the snow and ice. Honestly when the jeep was given to me, i declared it as being jeep abused, little to NO maintenance what so ever. The spark plugs still had the factory ones installed after 168,000 miles on it. Only had 3 oil changes done, nothing else. All vaccume lines clogged with dirt, EVAC system rotted out, and i can go on and on.
But the main thing is, If there is no other option, get a rebuild transfer case. It be easier and less time consuming for your fix.