I was at the IBM LTC from 2001--2009 as an STSM, and my understanding was that DE's could absolutely get promoted to Fellows. So assuming that Fellows are "just" the highest rank of the research rank is not really accurate. Perhaps that's what you mean by "diluting the merit of the title", but that sounds like you're coming from the Research side of IBM. :-)

Yes, it's rare for a DE to get promoted to be a Fellow, but that's because there are very few Fellows at IBM. And there's no reason why a Fellow would want to become a DE, since that would mean taking a pay cut. (See below)

From a salary band perspective, STSM is actually the highest rank of the engineering track (aka Band 10). A DE is paid on the bottom rung of the executive track (Band D), while a Fellow is paid as an Executive Band C. Which means a Fellow may be the highest rank of the "research track" but a Fellow is still going to rank below an SVP or GM from a salary perspective. :-)