The Fed is flying blind. Investors don’t seem to care.

The basic question is whether half-percentage-point cuts are the new normal. Fed policymakers say not: Only one official predicted cuts of more than a quarter point at the two meetings between now and the end of the year. Two, in their “dot plot" forecasts, predicted no more cuts, and the rest said one or two cuts.

But who cares what they say? Markets got into the spirit of dovishness that Chairman Jerome Powell now exudes and concluded that there’s a decent chance that half a point is the new quarter point.

Futures traders set their central case for the end of the year of another three-quarters of a point of cuts, meaning at least one of the two remaining meetings needs to be a double cut for them to make money. By Friday they had priced in a 25% chance that both meetings have double-sized cuts, and the same chance that the Fed does what its median policymaker says and merely cuts a normal quarter-point at each meeting.

The cynic in me supports the idea of ignoring the central bank’s own prognostications, since it is terrible at predicting what it will do. Just this year the median policymaker’s rate forecast has swung from predicting three (normal quarter-point) rate cuts by the end of this year, down to one in its dot plot three months ago, and now back up to four, including last week’s double. Why should investors think this particular prediction is the right one?

It’s even worse if you try to look further out. Much of what matters when assessing how the Fed will react to any given economic development is where it thinks rates will eventually land in a balanced economy—what economists call the neutral rate, or r-star. Unfortunately policymakers are showing their confusion about where it lies, with their estimates ranging from 2.4% to 3.8%, and much higher than before the pandemic.

This wide gap reflects the uncertainty about future inflationary pressures from deglobalization, a spendthrift government more willing to interfere in the economy, military and green spending and the aging global population. For what it’s worth, the overnight indexed swap market is pricing long-term rates higher than the median policymaker forecast.

And that’s even before you get to the logical problem created by the feedback from Fed forecasts. What Mr. Powell and other policymakers say they expect to do usually has a strong influence on bond yields and so borrowing costs, affecting the economy. If they get their communications right, the market will do their work for them—meaning the Fed itself may end up not needing to do what it planned.

That isn’t the case this time, though. Investors have decided that the Fed will be much more dovish than it says. And the effect is to push down the cost of short-term borrowing as traders anticipate lower rates, while pushing up the cost of longer-term borrowing as investors prepare for the resulting stronger economy to pressure inflation.

The size of the market moves that resulted were chunky for such a short period. Smaller stocks leapt more than 2% on Thursday as lower interest rates promised relief on their heavy debt costs. The hard-hit speculative growth companies had a particularly good day on Thursday, as did the lowest-rated junk bonds, CCC and below, whose yield is almost back down to the extra above Treasurys they offered just after the Fed’s first post-Covid-19 rate rise in 2022.

This reaction is hard to square with a Fed embarking on a series of supersize cuts, something it has done in the past only when recession loomed. If investors were bracing for recession, fair enough. Instead, longer-dated bonds priced in a little more inflation in the long run, with the 30-year Treasury jumping back above 4% after a long decline from April’s 4.8%.

This is truly pricing for perfection. To work out, investors need inflation to come in cooler and the jobs market to weaken a bit more so that the Fed can get comfortable with big cuts, all without any threat of recession that would push up corporate defaults, hit stocks and drag down long-dated bond yields.

Something is likely to give, either trouble in the economy or smaller rate cuts than are priced in. Much as I hate to say it, maybe investors should be listening more to what the Fed says about the rest of the year—and worrying that uncertainty about the long term means volatility ahead as the Fed tries to feel its way in the dark.

Write to James Mackintosh at james.mackintosh@wsj.com