I mean, you have already figured it out. You need to disable the "Disable creating / editing users from the frontend" feature.
If you go to Components, Admin Tools, Web Application Firewall, Configure WAF, Hardening Options tab and click on the Toggle Inline Help toolbar button you will see that the description for this feature reads the following:
You should normally be unable to create a new user with administrative backend login privileges from the public frontend. When this option is enabled it will treat attempts to create this kind of accounts as hacking attempts and block them from executing. This addresses some of the most notorious zero day attacks in Joomla! which took place between 2015 and 2016.
So, yup, enabling this feature will prevent you from creating or editing any use account with backend access from the frontend of the site. When you use the Forgot Password feature what happens is that you are indeed editing the user. The first step edits the user to set them as unauthorised, the second step reverses that change and changes their password. These are user edits, and they are blocked.
This is not a bug, it's a desirable feature. If this feature is disabled and someone knows the email address of your admin user they can keep triggering the password reset, essentially blocking the admin user from accessing the site (since they will be perpetually unauthorised). This can be exploited by an attacker to lock out your regular admins while they are attacking the backend of your site.
Moreover, this feature blocks the kind of unauthorised user changes which were possible back in 2015 with a widely exploited zero-day vulnerability in Joomla!. If Joomla!, or a third party extension (and it's happened recently with a number of third party extensions!), has a vulnerability which allows an unauthorised user to change your admin user's email, user group assignments, or blocked status this feature will prevent attackers from exploiting the vulnerability, protecting your site.
If you absolutely want self-service password resets for backend users -- a practice that is widely considered VERY INSECURE -- you can of course disable this feature in Admin Tools. Just keep in mind that what you are doing may open your site to attack if there is an exploitable vulnerability affecting user account changes either in core Joomla! or a third party extension.
Nicholas K. Dionysopoulos
Lead Developer and Director
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