"In theory, there is no difference between theory and practice. In practice, there is."

Yogi Berra

In its Dec. 12 announcement, the Federal Reserve directly connected its current policy of keeping interest rates unnaturally -- and in my opinion, punishingly -- low, and the unemployment rate, announcing that it will keep rates at essentially zero until unemployment drops below 6.5 percent.

Economic theory suggests that low interest rates stimulate job growth. Low rates encourage consumer borrowing and business investment, which drives economic growth, which stimulates hiring, which lowers unemployment. In theory.

As the great sage of baseball notes, theory and practice are two separate things. The Fed's policy isn't working, and it's doing more harm than good, producing more losers than winners.

The losers are the nation's savers and any business or government entity responsible for funding long-term obligations. Anyone trying to prudently save for retirement is challenged. This is particularly problematic for baby boomers, many of whom are gravitating to more conservative investments such as fixed-income investments.

With inflation running about 2 percent a year, it has become increasingly difficult, if not impossible, to keep up with inflation using this strategy without taking on significantly more risk. This seems particularly unfair to me, since generally these folks are not the ones who borrowed irresponsibly, contributing to the financial crisis in the first place.

If there is any consolation to the unnaturally low rates, it is that households that prudently managed their credit ratings and did not over-borrow against their homes are now able to refinance their mortgages at extraordinarily low rates, often substantially reducing their monthly mortgage expense.

Ultra-low interest rates also have a punishing impact on pension funds and life insurance companies, which must invest to meet pension, insurance and annuity obligations. Low rates increase the funding obligations of pension plans, many of which are school districts and municipalities. Low rates also drive up premiums on life insurance and annuities, making it more difficult for people to provide for their families and retirement.

Big borrowers are the winners, and the biggest winner of all is the U.S. government, able to service its massive debt at unnaturally low costs. As a percent of gross domestic product (GDP), the cost of financing the U.S. debt is currently the lowest it has been since World War II. Plus, given the Fed's legal requirement to remit back to the U.S. Treasury the interest it earns on its now towering $4 trillion government securities portfolio, the government is now receiving north of $80 billion a year in interest reimbursements.

Insult to injury

Adding insult to injury is the fact that the Fed's policy isn't stimulating the sort of 4 to 6 percent annual growth that we often see in a recovery. After four years of zero interest rates we have only recovered half the jobs lost in the downturn.

According to the Bureau of Labor Statistics, small businesses (fewer than 500 employees) create virtually all net new jobs in the economy. Problem is, after peaking at nearly $340 billion in 2008, commercial and industrial loans of less than $1 million -- namely loans to small businesses -- have steadily fallen to just over $270 billion, according to the FDIC. Meanwhile, a recent Federal Reserve study shows that the availability of so-called "microloans" under $100,000 remains severely restricted.

In fact, interest rates don't seem to be the problem. In its most recent small business survey, the National Federation of Independent Business found that 64 percent of those responding cited either "economic conditions" or "political climate" as their reasons for not expanding their businesses, while only 1 percent cited financing and interest rates.

The real problem is the federal budget, not interest rates. Congress and the president have been presented with some sensible ideas aimed at stimulating economic growth -- and creating jobs. Officials on both sides of the aisle have said that the present deficit is unsustainable and long-term debt is a threat to our continued prosperity.

The politics are challenging, but there appears to be growing consensus that the numbers are real, which I hope will lead to a bipartisan solution.

The Fed has one tool in its box -- the level of interest rates. However, as the Fed acknowledges, low interest rates cannot compensate for unresolved budget problems. The Fed is doing more than it should, at the expense of people who are trying to manage their financial affairs wisely.

Washington needs to address the real problems that are holding back economic growth and job creation.