You don't run setup-passwords on each node individually, you run it once for the whole cluster. You don't need to fix step 3, because you've already run step 4.
The reason step 3 is failing is because you only have a master node online, and no data nodes. The password change cannot be processed if there are no data nodes available to store the new passwords.
Your cluster topology is very strange, and is going to cause these sorts of problems. Why are you trying to run a dedicated master in a 2 node cluster?