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The raw image is booting without issues. I followed the setup steps in the documentation, mainly changing BIOS to UEFI and adding an emulated TPM.
When TPM is later removed, it does fall back to password authentication and is able to unlock the disk and boot successfully. When re-added again, the system boots without any password prompt.

Here is a copy of audit.log after playing with the TPM fallback. I have also enabled root login via ssh to pull the log from the system, which works fine and without the need to modify anything in SELinux.

echo "PermitRootLogin yes" > /etc/ssh/sshd_config.d/root.conf
systemctl restart sshd

Excellent work, thank you for testing milestone 2 candidate!