Whenever I put it in 2H it still says that it is in 4wd. When I pull it up all the way it still says it. When I go back down, into 4H the light doesn't appear but when I push it all the way down, the light shows up. It feels like it's in 4wd still.. Idk what to do.
That is not the tire rubbing the fender. It's the engaged front diff loading up and storing energy because it's probably in 4HI.
Crawl under the jeep from the driver side and look up under the skid plate on the drivers side. You'll see the bracket and connector for the 4x4 shifter. There is a bolt on the back (rear) that holds the connector rod in place. Loosen it and then grab the connector rod and push (or pull) it forward toward the front of the jeep. That is 2hi.
Once it's in 2hi, re-tighten the bold and your shifter should work fine after that.
hm, try putting in in 4l.. then drive a bit.. then stop put in 4h, then drive a bit then 2wd, maybe try back up a few feet and see if that help. or You could very very very carefully jack it up on on the frame so all tires are off ground and see if all the tires move or not...
CJ.XJ.CJ. TJ. TJ.ZJ. TJ.TJ. ZJ.ZJ.YJ. XJ
Ok, there are 2 rods under there. One (closest to you in the photo) goes from the tub mounted lever to the selection switch on the transfer case.
The other is the "actuator". That one has a bolt in the rear holding the rod in place. Loosen it. From what you've described, it is mis-adjusted and even when the lever is all the way forward it's not pushing the rod enough to select 2HI on the xfer case.
So, after you've lossened the bolt on the upper (in the photo) rod, use the lower to actuate the xfer case switch to all the way "forward".