Federal Reserve governor Lisa Cook will file a lawsuit challenging her removal by President Donald Trump, marking a major escalation in the president’s battle with 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 US president nominates candidates for this 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.

Cook voted alongside Powell and most other members of the committee to maintain US interest rates at the Fed’s last rate-setting meeting at the end of July.

She was appointed by Trump’s predecessor, Democrat Joe Biden, in 2022 and is the first African American woman to serve in the role.

Trump’s decision to remove her will likely raise legal questions, with experts suggesting the White House will need to demonstrate – potentially in court – that it had sufficient reason to fire her.

Cook said in a statement that Trump “purported to fire me ‘for cause’ when no cause exists under the law, and he has no authority to do so”.

“I will not resign. I will continue to carry out my duties to help the American economy as I have been doing since 2022,” she added.

The Federal Reserve has not yet commented on the president’s announcement, which he made late on Monday via his social media platform Truth Social.

According to Trump’s post, Cook signed one document attesting that a property in Michigan would be her primary residence for the next year.

“Two weeks later, you signed another document for a property in Georgia stating that it would be your primary residence for the next year,” the president said.

“It is inconceivable that you were not aware of your first commitment when making the second,” he wrote.

The president’s conflict with Cook and Powell – whom Trump has suggested he wants to fire for not cutting interest rates fast enough – also raises questions about the Fed’s independence from politics.

Many economists believe the Fed and other central banks need independence in order to make financial policy in the public’s interest.

European markets opened slightly down on Tuesday following Trump’s decision while the rate the US government has to pay on its bonds, issued to raise money, increased.

Meanwhile, the US dollar dropped against major world currencies following Trump’s post but has since recovered.

“[The] key question for markets is if Trump succeeds in replacing Cook, could he reshape the Fed’s composition and how would that impact the market’s perception on US investability?” said Julia Lee, head of client coverage for FTSE Russell.

The president had called for Cook’s resignation last week over the allegation of mortgage fraud, which was first made in a public letter from housing finance regulator, Bill Pulte, a Trump ally, to Attorney General Pam Bondi.

The housing finance regulator called the letter a “criminal referral” and urged the justice department to investigate. It is not clear whether an investigation has been opened.

Cook told the BBC last week that she learned of the allegations from the media, and the matter stemmed from a mortgage loan application she made four years ago, before she joined the central bank.

“I have no intention of being bullied to step down from my position because of some questions raised in a tweet,” she said, adding that she was “gathering the accurate information to answer any legitimate questions and provide the facts”. (BBC)