User is trying to use the Update Rates feature in the Time Entries screen to update the rates of time entries to the current default rates by selecting the Use current bill rates and Use current cost rates options in the Update Rates dialog. There is no fee schedule set, but the project rule Use bill rates from Activity Items screen is enabled. As per the rate hierarchy in Core, on updating the rates, the rates set in the Activity Items screen should be used. However, that does not happen and the rates on the time entry do not update.
This can happen if the time entry is flagged as overtime. In that case, the default rates are the overtime rates set for the employee (when there is no fee schedule). Thus, Core uses those rates on the overtime entries. If you want to adjust the rates for overtime entries, you should either use a fee schedule or set the proper overtime rates for the employee. Check the Core Help for more on fee schedules and setting up employee overtime.