What exactly do you mean by VS Code not recognizing you config file? I copied your config file into an app and got your blue theme displaying fine. (You are missing a hashtag on one of your hex colors, but that didn’t cause a parsing issue for me in Streamlit 1.21.0 at least.) It appears your files are named correctly and save correctly in relation to each other. If this was a deployed app on Streamlit Cloud, I’d advise you to reboot your app since updates to the config file may not reflect after the app is already running.
However, I use VS Code too, and I’ve never had trouble updating theme colors on the fly. I suppose your first try to should be to double check everything is saved then close your terminal and relaunch your app to be sure. Also, make sure you haven’t selected anything from the hamburger menu in the upper right to override the theme.
Have you tried any other browsers to confirm if it consistent elsewhere?