I’ve observed this as well, and it has serious privacy implications. Party chat used to be private, and when it was active, the in-game microphone was supposed to be muted so you could talk to friends without being overheard. I say “supposed to be” because this appears to have been broken for a long time. With party chat active, both the party mic and the in-game mic seemed to be live at the same time. People in the party could hear an echo of their own voices because the two audio paths were slightly out of sync, and players in the game could overhear what was meant to be a private conversation. Rather than fixing the issue, Meta seems to have buried it. I filed a bug report over two years ago and posted about it on the forum, but never received a response to the bug report, and the forum post later disappeared.
So it appears that rather than fix the issue, the ability to switch between the two has been removed