What
The launch folder is the folder Claude Code was started in, and it can hold its own settings. Claude Code now removes a list of sensitive settings from that folder's settings before combining them with the rest, unless a policy says they should be read as written. The list includes:
Why
These settings can turn on plugins, approve MCP servers (outside tools Claude can call), move where memory is stored or redirect which model is used. Dropping them from a folder's own settings stops an untrusted folder from quietly changing them when you start Claude Code there.
Documented inclaude-code/mcp
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It is not clear what sets the policy that decides whether these settings are kept or removed.