How do I tell VS code what toolchain I want to use?

Press Close to select toolchain :)

The extension will provide a prompt after you close that prompt, which allows you to select the toolchain you want. You can see the toolchain that you selected in your preferences file.

As the message says, you must choose a toolchain (documentation here):

$ rustup default stable

for the stable Rust, or

$ rustup default nightly

for the newest development version.

If you only want to play with Rust, I advise you to use nightly Rust because there are more new things in it.

Add this to your configuration with toolchain you want to use to enforce it in VS Code:

"rust.rustup": {
    "toolchain": "stable-x86_64-apple-darwin"
  }