iCloud Optimize Mac Storage deletes files I use daily, even with 'Keep Downloaded' selected

I recently updated to Sequoia 15.5 (2023 M3 Max, 64gb). One day when trying to serve my local Python application, after much confusion I discovered that iCloud had deleted the files and vvenv locally despite the fact that this is one of few folders that I use every single day.

I tried turning off 'Optimize Mac Storage', but doing so packed my 2TB hard drive out to 1.99TB and made the computer unusable. Turning it off again, and I found my daily used folders deleted again today despite the fact that 'Keep Downloaded' is selected!

Moreover, when I try to 'Download Now', this 500mb folder has taken 30 min and counting despite a fast internet connection. This is so frustrating!