I’m afraid it doesn’t change the behaviour of the setting in any way, only what is marked as the default.
If a user has ‘Hide my public profile and presence features’ enabled it will hide their profile and ‘x is typing’ indicator from anon and all non-staff users.
There are a couple of connected admin settings that also have an effect - allow users to hide profile and hide user profiles from public (which disables user information features for anon), but neither would limit avatar visibility.