Windows Server 2019 VSCode 1.59.1 PowerShell 7.1.4 (same with PS 5.1)
Uninstall PS 7, VS Code, reinstall. $Profile files are all empty. settings.json is empty.
Typing 1 character on terminal command line is ok (plain character on terminal background). Typing a second or more characters gets this strange highlight (background turns magenta, same character color). I have the same setup across 4 computers and they are ok, just this one on the Server has this problem. The weird color highlighting makes it very hard to read!
Note PS 5.1, PS 7.1 by themselves do not do this - just in VS Code!