New MacBook now iPhone asking to update Apple ID Settings - MacBook Password Wrong

I bought a new Macbook Pro and am able to login using the new user account/password locally. I am able to login and download all old apps (and new) via App Store using the same Apple ID. I am able to login and use iCloud on both devices.

My iPhone was showing a red update icon and asked that I update Apple ID settings to continue using. In the update process, it asks for my MacBook password, which when entered, it says is wrong. So I locked my MacBook and unlocked it using the same password with no issues.

I am unable to find any posts on this issue, due to the wordings used.

• I am able to log into my Apple ID from web, iphone and mac
• I am able to log into iCloud from web, iphone and mac
• I am able to unlock the iphone and mac with known passwords and passcodes

It seems as if the password on iCloud for the Macbook is not synced correctly with the MacBook. Is there a process to correct that, since I have checked in iCloud, Apple ID and I do not see any options around this. This process is showing as failed passcode attempts when I restart the process. I finally chose to remove encrypted data to be done with this process. What else should I have done to get this working correctly, as I assume my MacBook will be disconnected from iCloud or have an issue with the Apple ID now.

Additional notes - I was on the 200GB iCloud+, and have upgraded to 2TB. Not sure if this was any way related since the 200GB was about 90% used.