If you have your Anaconda installed and your VSCode can recognize it in interpreter selection like below, then do not bother the system environment variables.
This is most likely caused by an old bug in VSCode:
https://github.com/microsoft/vscode-python/issues/9774
What you need to do here is just change the default terminal used by VSCode from PowerShell to CMD.
Bang, you are all set now.
D:\documents\python>C:/Users/me/Anaconda3/Scripts/activate
(base) D:\documents\python>conda activate base
(base) D:\documents\python> cmd /C "C:\Users\me\Anaconda3\python.exe c:\Users\me\.vscode\extensions\ms-python.python-2022.2.1924087327\pythonFiles\lib\python\debugpy\launcher 11319 -- d:\documents\python\vscode.py "
hello
(base) D:\documents\python>