Strange behavior of files.exclude in workspace with deep nested folders

<!-- ⚠️⚠️ Do Not Delete This! bug_report_template ⚠️⚠️ --> <!-- Please read our Rules of Conduct: https://opensource.microsoft.com/codeofconduct/ --> <!-- 🕮 Read our guide about submitting issues: https://github.com/microsoft/vscode/wiki/Submitting-Bugs-and-Suggestions --> <!-- 🔎 Search existing issues to avoid creating duplicates. --> <!-- 🧪 Test using the latest Insiders build to see if your issue has already been fixed: https://code.visualstudio.com/insiders/ --> <!-- 💡 Instead of creating your report here, use 'Report Issue' from the 'Help' menu in VS Code to pre-fill useful information. --> <!-- 🔧 Launch with `code --disable-extensions` to check. --> Does this issue occur when all extensions are disabled?: Yes <!-- 🪓 If you answered No above, use 'Help: Start Extension Bisect' from Command Palette to try to identify the cause. --> <!-- 📣 Issues caused by an extension need to be reported directly to the extension publisher. The 'Help > Report Issue' dialog can assist with this. --> - VS Code Version: 1.67.2 - OS Version: Windows 11 x64 Related issues: https://github.com/microsoft/vscode/issues/118557 https://github.com/microsoft/vscode/issues/150764 Steps to Reproduce: 1. Create a root folder `folder-exclude-sample` 2. Inside that folder create a folder `packages` 3. Inside that folder create two nested folders `module-a` & `module-b` 4. Inside each folder, `module-a` & `module-b` create at least four files: `test1.txt`, `test2.txt`, `test3.txt` & `package.json` 5. In root folder (`folder-exclude-sample`), create a workspace definition file `folder-exclude-sample.code-workspace` ```json { "folders": [ { "name": "Root", "path": "." }, { "name": "Module-A", "path": "packages/module-a" }, { "name": "Module-B", "path": "packages/module-b" } ], "settings": { "files.exclude": { "packages": true } } } ``` Alternatively to previous steps, just clone this GitHub repo: https://github.…