President Donald Trump on Wednesday threatened to impose tariffs on the European Union or halt trade with the bloc entirely if it proceeds with its plan to make Canada its first-ever “associate member.”

“I think it’s laughable … Canada has been a terrible trade partner,” Trump told reporters after landing in North Carolina. He conditioned his threat on the intention of European leaders, saying that “if I think it’s at all a hostile act, I will put very serious tariffs or stop trading with Europe on many things.”

Trump’s remarks came after European Commission President Ursula von der Leyen said EU was opening the door for Canada to become the first associate member of the 27-member bloc.

Associate membership doesn’t currently exist as a formal category under EU treaties, and any such arrangement would need to be created and ratified by member states.

The proposal came as Brussels and Ottawa seek to deepen ties, signaling a significant shift in the EU, which had been lukewarm to Germany’s proposal in May for granting an associate membership to Ukraine.

In her annual state of the EU address in Strasbourg, France, the EU chief said the bloc wants to bring the relationship with Canada “to the highest level possible.”

Canadian Prime Minister Mark Carney, who attended the address, has said in the past that Ottawa was keen to pursue a “unique security and economic alliance” with Europe, but not a full membership.

Canada has sought to diversify away from the U.S. following months of escalating trade tensions and as bilateral trade talks have collapsed. Trump has slapped a 50% tariff on Canadian goods and plans to ban the country’s dairy, alcohol and auto imports later this month, drawing retaliation from Ottawa.

“Washington and Ottawa may find an off-ramp from the current trade war, but Canada will continue to reduce its vulnerability to U.S. economic pressure,” said James Lindsay, a senior fellow at Council on Foreign Relations.

Von der Leyen’s pitch to Canada includes joint work on manufacturing, integration of defense-industrial bases, a tech alliance, energy, artificial intelligence and cooperation in the Arctic.

Canada is already the only non-European country in the EU’s SAFE instrument — an initiative that provides Canadian firms with preferential access to defense procurement — and has a free-trade agreement with the bloc, eliminating tariffs on roughly 99% of goods, though that deal still requires ratification by 10 EU states.

Any fresh U.S. tariffs on the EU would test the trade framework Washington and Brussels struck last year, which set a 15% tariff ceiling on most EU exports to the U.S.

Brussels hasn’t said whether it will proceed with the associate-member proposal in the face of Trump’s threat. EU member states — several of which were reportedly blindsided by the announcement — are yet to respond to Trump’s threat.

Oil prices fell Thursday as Saudi Arabia shifts some crude exports through the Strait of Hormuz to compensate for the closure of a key pipeline, easing market fears that the outage will cause another major disruption to global supplies.

Brent futures, the international benchmark, lost $1.01 to close at $104.82 per barrel. U.S. West Texas Intermediate crude shed 52 cents to settle at $101.91. U.S. crude oil is up nearly 2% for the week and has advanced more than 18% for the month.

The Saudis are making additional crude cargoes available to Asian refiners through ship-to-ship transfers just outside Hormuz near Oman’s Sohar port, sources familiar with the matter told Reuters.

Shuttle vessels transport crude through Hormuz and then load it onto tankers waiting outside the strait, which allows these ships to avoid the risk of Iranian attack while sailing into the Gulf.

Saudi crude loadings at its Mideast Gulf ports are up so far this month, said Matt Smith, director of commodity research at Kpler. And ship transfers in the Gulf of Oman have risen to 2.7 million barrels per day compared with 1.5 million bpd in August, Smith said. But it is difficult to know whether the Saudis or other Gulf states are behind those transfers, he said.

U.S. Energy Secretary Chris Wright told CNBC on Tuesday that the Saudis have taken “quick action” to export more oil through Hormuz with the assistance of the U.S. military.

Earlier this week, the Saudis halted crude loadings at the Red Sea export terminal at Yanbu and canceled some shipments to European customers, industry sources told Reuters.

Yanbu has become Saudi Arabia’s key route for oil exports since Iran began attacking tankers in the Strait of Hormuz following U.S. and Israeli attacks on the country in late February.

The Saudis closed the East-West pipeline late last week after it sustained damage in a drone attack launched from Iraq. The U.S. Energy secretary told CNBC the outage is a “brief and temporary interruption” that “will be measured in days.” But independent analysts warn it could take weeks or months to repair the damage.

Rapidan Energy expects Saudi crude oil exports to fall by 400,000 barrels per day this month due to the pipeline outage. But lower shipments from Yanbu should be partly offset by higher exports through Hormuz, Rapidan said.

“Risk remains skewed toward a larger disruption if the pipeline outage extends past September or Iran, the Houthis, or other proxy groups escalate attacks,” Rapidan told clients in a Thursday note.

The Federal Reserve on Wednesday carried out its first interest rate increase in more than three years and signaled that another hike is on the way, as part of an effort aimed at combating inflation driven by soaring oil prices and other factors.

In a move that markets widely anticipated, the central bank’s Federal Open Market Committee voted 12-0 to raise its key interest rate by a quarter percentage point, or 25 basis points. The move brought the overnight funds rate to a target range of 3.75%-4%.

“Inflation remains elevated,” the committee said in its brief post-meeting statement. “Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”

During a news conference, Chairman Kevin Warsh said inflation has been “too high … for too long.”

“We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed,” he said. “Today, the FOMC decided that this standard has not been satisfied.”

Warsh further explained that recent economic reports showed the economy, including the labor market, was strong. However, inflation remained above the central bank’s target, and added that tension in the Middle East also contributed to the decision.

“All three of those things lend themselves to a firm unanimous decision today,” he said.

Highly anticipated

Despite a raft of conflicting recent statements from policymakers, markets had priced in a better than 90% chance that the FOMC would approve the increase, though there was chatter about the possibility of multiple dissents.

Persistently high inflation readings coupled with statements from Warsh a few weeks ago had convinced Wall Street that the Fed would OK its first rate increase since July 2023.

Updated projections the committee released Wednesday showed that a strong majority of officials think another hike is possible later this year.

The dot-plot grid of individual officials’ expectations indicated that 16 of the 18 participants – Warsh has chosen not to submit a dot since taking the position – expected another rate increase, with four of those seeing two more as possible. Two participants expected the committee to stop at one hike.

However, there are no increases penciled in for subsequent years, with one cut each indicated for 2028 and at least one for 2029.

Officials also nudged up their expectations for inflation this year.

They see the headline personal consumption expenditures price index at 3.7% and the core excluding food and energy at 3.4%, both 0.1 percentage point higher than the last update in June. The Fed doesn’t expect to reach its inflation target until 2029, though it sees both measures dropping off sharply in 2027 – 2.3% for headline and 2.5% for core.

The committee had been on hold all year and was expected to stay there, until the tide began turning toward a hike in late August.

Fed rarely moves once

The Fed rarely only moves once, as policymakers generally eschew incremental decisions when they think inflation is too high and needs elevated rates, or when growth is too slow and the central bank tries to boost demand with lower rates.

While the Fed’s action was expected, the rationale behind the hike was unusual.

The Fed generally looks through the kind of inflation the economy is experiencing now, with the higher fuel costs from the Iran war and the lingering impacts from tariffs. However, officials in recent days have weighed the cost of continuing to look through the price increases, particularly in light of a stabilizing labor market. The committee lowered its outlook for the unemployment rate to 4.1%, down 0.2 percentage point from June.

The worry now is that the duration of the energy prices could raise inflation expectations and start to spread through the economy. Economists also see expanded investment in artificial intelligence as a potential inflationary factor.

Also, the “transitory” episode from a few years ago is still fresh in policymakers’ minds, as Fed officials thought the supply and demand shock from the Covid pandemic eventually would fade. Instead, inflation readings hit 40-year highs before the Fed decided to act.

In July, the debate generated considerable dissent on the policy view, with three FOMC members voting against the decision to hold, preferring instead a quarter-point hike.

At this week’s meeting, 2027 was a fairly close call, with eight officials pointing to another hike, six seeing the funds rate holding steady and four envisioning cuts.

Markets already have been pricing in higher rates across the spectrum. The S&P 500

Treasury yields have been surging. The 10-year note has risen about a quarter percentage point since Warsh’s remarks at the Fed’s Jackson Hole, Wyoming, symposium on Aug. 28. The benchmark is up about a full percentage point since its February low. The 2-year note, which is most sensitive to rate expectations, has seen even sharper gains.

Borrowing costs also have been on the move. A 30-year fixed-rate mortgage had soared to 7.19%, up some 38 basis points since the Jackson Hole speech and more than a full percentage point from a year ago, according to Mortgage News Daily.

In the wake of the decision, Treasury yields were lower, a signal that investors were encouraged by the central bank’s attempt to tamp down inflation. Yields and prices move in opposite directions.

“Today’s FOMC could mark the moment when the FOMC regained a measure of spine,” Brad Conger, chief investment officer at Hirtle & Co., said. “There were many arguments for standing still. But for once, the committee sided with main street.”

“Inflation is a pervasive concern, and its uncertainty is impeding decision-making among all businesses. One swallow doesn’t make a spring, but we might have just caught a glimpse of Volckerian decisiveness as opposed to the eternal sycophancy of the Powell era,” Conger added.