In all honesty I think we are asking the wrong question. I think the question is "...what is wrong with Microsoft's mail servers...".
I use two Outlook and two Hotmail accounts for various purposes, across my MacBook, iPhone, Windows desktop and Surface laptop.
For several days I have been experiencing this really annoying situation of being prompted for passwords frequently, but inconsistently. I sometimes have to enter the password 5 or more times before it is accepted and verified. I can reliably type my passwords.
I have not messed with my settings.
I believe the issue is at the mail server end of things, maybe with corrupted databases or timeouts on security checks.
I believe all the advice Microsoft give to resolve the issue is nonsense as it assumes the issue is with the user/client end.
Microsoft please sort this problem and communicate the real issue. It has happened before and mysteriously gone again after a few weeks. I assume you found the fault in your platforms.