I cannot turn off iCloud Keychain, please help Apple's implementation of two-factor authentication is asking me to input my iPhone password on my Mac.

I feel that this is inappropriate, and I suspect that iCloud (which I have disabled) is attempting to enable iCloud Keychain when I have specifically NOT authorized this.

Compare this to when I login to apple.com. This sends me a one-time password to my device and I type it in. That is what I was expecting.

So, how I do make this dialog go away without providing my iPhone password to my computer or my computer password to my iPhone?

Also, I note that I can set reminders (synced to Apple) on my computer and retrieve them on my phone. So clearly my account sync is working. What additional feature is the computer actually trying to set up with this dialog?
This is not Apple's two-factor-authentication — this is iCloud keychain. To sync your keychain, you need to enter the password for the device asked. Other iCloud functionality will continue to work, since you've already passed 2FA.