I used to ride a bike sized way too large for me, so I was used to riding with the seat low. Once I got my new bike (it's a 54cm too, although I'm 5'9" with short arms) and raised the seat to an appropriate level after some advice from this lovely forum (knee should be bent slightly with your leg fully extended when the pedals are at 6 oclock), pedalling got much tougher and I had a bit of muscle pain around the knee. After about a week, however, the pain went away and my cruising speed increased by an easy 5 mp/h. I believe (feel free to correct me if I'm wrong, guys) that when your seat is too low, you carry a lot of your weight on your bones, but when you raise the seat to the proper height, your muscles carry more weight and it takes time to get used to that.
As for your reach problems after adjusting the seat height, I had a problem of a similar nature. Once I had my seat at the correct height, my 105mm stem was just a bit too long for comfort. When the seat was lower, I had a bit of bend in my elbows on the tops, which was perfect and comfortable. Once it was raised, my arms were totally straight - not a good thing for absorbing road shock. I swapped my 105mm stem for a 90mm stem and everything is golden now.
Can you describe what your arm problems are in more detail? Do they feel too cramped? Are the handlebars too close to you? You could even post a picture for the discerning minds of Bike Forums to look over.