FDFORMAT is probably the one you are thinking of
Sounds like DoubleSpace (later renamed to DriveSpace), which was built into MSDOS and early Windows versions.
That was totally different. DoubleSpace made a virtual drive in a file and did software compression/decompression with a driver during writes and reads. It was a clone of Stacker, and both were slow as heck (but hard drives were only 40MB, so sometimes it was worth it).
Not Microsoft, they used 1.68MB: https://en.wikipedia.org/wiki/Distribution_Media_Format
Not me either, I used some utility whose name I've forgotten (might be fdformat as mentioned on that page) to get something like 1.74MB pretty reliably. I think I needed a driver loaded for it to work, but seem to remember either Windows 95 or 98 supporting it natively.