The microscopic origin of magnetism in CeFe₂ has remained unresolved for almost forty years, where polarized-neutron diffraction and x-ray magnetic circular dichroism infer markedly different Ce 4f spin and orbital moments, that also are in disagreement with theory. We show here that within a relativistic multi-impurity DFT+DMFT framework, where the Fe 3d states are treated by spin-polarized T-matrix fluctuation exchange and Ce 4f orbitals by a bath-coupled configuration-interaction solver, this long standing problem is resolved. This level of theory is exclusive in reproducing magnetic moments (spin and orbital) for both the Ce and Fe atoms, yielding a total moment in agreement with the measured saturation moment. The theory put forth here is much closer to the atom specific moments reported from XMCD, compared to values from polarized-neutron diffraction. The occupation ⟨ n_f⟩=0.85 and charge variance δ n_f²=0.27 establish substantial valence fluctuations, while the spectral function simultaneously recovers significant weight at the Fermi level together with separate incoherent structures. These results identify bath-mediated polarization and configuration mixing as the essential ingredients governing the electronic structure and magnetism of CeFe₂.