I know that is very late for this answer, but for me it just worked.
I put exactly as above and it launched in my home directory (that is /mnt/d/Users/Adrian).
I have the user setup of VSC, 1.30.1 and launch it from the Desktop shortcut.
After I configured terminal as wsl I go as below:
If I open a cmd windows I can launch it with code . it will launch in Windows home directory.
If move to some other folder (e.g Documents) and launch it with code . the bash will launch to that folder.
Otherwise I can launch it with code D:\Users\Adrian\Documents\VSC and the bash terminal will launch in \mnt\D\Users\Adrian\Documents\VSC
Tested the change both via menu File->Preferences->Settings and with Ctrl+Shift+P (Command Pallete), Terminal: Default Shell.
Tried with bash and wsl.
Maybe you have some other bash installed in the path? (e.g. git bash or MinGW bash?)