The Fed chairman shook up the markets today. "Although the anticipated slowdown in growth is underway, financial markets shouldn't question the inflation-fighting credentials of the Federal Reserve Bank, Chairman Ben Bernanke said Monday. 'There is a strong consensus' among FOMC members to keep inflation low, Bernanke told an international banking forum here."

"Recent core inflation readings 'have been higher in recent months' and 'has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth,' Bernanke said."

"These core readings 'are unwelcome developments,' he said. 'Therefore, the FOMC will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained,' Bernanke said."

From the Feds website. "'It is reasonably clear that the U.S. economy is entering a period of transition. As had been expected, recent readings..indicate that the housing market is cooling, partly in response to increases in mortgage rates."

"Overall, housing activity has softened relative to the high levels of last summer, and the rate of house-price appreciation appears to have lessened.'"

"'In addition, the Committee must continue to resist any tendency for increases in energy and commodity prices to become permanently embedded in core inflation. The best way to prevent increases in energy and commodity prices from leading to persistently higher rates of inflation is by anchoring the public’s long-term inflation expectations.'"

And Danielle DiMartino is watching Fed data too. "Households' fanciful notions of their financial health could soon awake to the reality of the longest Federal Reserve rate-hiking campaign in more than 25 years. A report due out soon, though, could finally call into question the strength of what has up to this point been the economy's bulletproof vest."

"The Federal Reserve releases its flow-of-funds data for the first quarter on Thursday. While it will surely reveal that household net worth has reached an all-time high, it will also write a few other records into the history books."

"We know from reports on house price gains that after peaking in the last year's second quarter, gains fell to their slowest pace in two years in the first quarter. And mortgage activity is sitting at a four-year low. At the same time, the so-called lag effects of the Fed's tightening campaign have begun to visibly take hold of U.S. households."

"The collision of these two factors, a slamming door on cashing out home equity and rising interest rates, will be most evident in one little line item of the Fed's report. Some of us will be gleaning the other news in the flow of funds data, that households' debt-to-asset ratios hit a new record; in other words, that debts grew at a faster rate than assets, as they have for years."

"I checked in with the Northern Trust Co.'s Paul Kasriel. He is the first person to point out the most revealing of line items in the release; 'Net Financial Investment.' The best way to view the line item is as the surplus or deficit households are running. The figure has traditionally been positive. These days, which started in 1999, when net financial investment turned negative, households rely on the rest of the world financing their expenditures."

"This is nothing new, you might be thinking. Think of the game of musical chairs. Now turn the music off. 'House prices are no longer rising as rapidly so the home-ATM machine can no longer be tapped,' Kasriel said. 'And households are devoting a record and rising level of their incomes to servicing their debts.'"

"This means that the backstop households have relied on for the last four years is fast disappearing. It was ever-increasing rates of price appreciation that allowed households to continue cashing out their home equity."

"Evidence of the strain was in Wal-Mart's news that store sales were disappointing in May, sentiment that was echoed by auto dealerships. 'We're at a major turning point right now,' Kasriel added."