Federal Reserve governor Lisa Cook will file a lawsuit challenging her removal by President Donald Trump, setting up a potential standoff between the president and the US central bank.
"President Trump has no authority to remove Federal Reserve Governor Lisa Cook," her lawyer Abbe David Lowell said in a statement.
The president has said there was "sufficient reason" to believe Cook had made false statements on her mortgage, and cited constitutional powers which he said allowed him to remove her.
The unprecedented move comes as Trump has put increasing pressure on the Fed - especially its chair Jerome Powell - over what he sees as an unwillingness to lower interest rates.
Long-dated US government securities sold off on Tuesday, hinting at increased perceived risk by investors worried that Trump's attempted firing of a Fed governor could undermine faith in the central bank.
If investors start to doubt the Fed's credibility, borrowing costs for the US government could rise – and that would have knock-on effects around the world since they are used to set the price of assets around the world.
Cook is one of seven members of the Fed's board of governors, and in this position sits on the 12-member committee which is responsible for setting interest rates in the US.
"His attempt to fire her, based solely on a referral letter, lacks any factual or legal basis," Cook's lawyer said on Tuesday. "We will be filing a lawsuit challenging this illegal action."
The Federal Reserve weighed in too.
"Congress, through the Federal Reserve Act, directs that governors serve in long, fixed terms and may be removed by the president only 'for cause'," the central bank said in a statement. "Long tenures and removal protections for governors serve as a vital safeguard, ensuring that monetary policy decisions are based on data, economic analysis, and the long-term interests of the American people."
On Cook's planned lawsuit against Trump, the bank said it would abide by an court decision.
On Tuesday, President Trump said he had several "good people" in mind to replace Cook.
"We need people that are 100% above board and it doesn't seem like she was," Trump told reporters at a cabinet meeting.
The US president nominates candidates for the role, so removing Ms Cook would mean she could be replaced by someone more favourable to lower interest rates and to the Trump economic agenda.
The Fed's decision affects the rate at which Americans can borrow money as well as the savings rates on their bank accounts. US interest rates are also closely watched by central banks who set monetary policy in other countries.
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