Interest Rates are plural because there are many of them. The most common way to view rates is in a Yield Curve (click here to see the US Treasury Yield Curve).

They are also amongst the most important and least understood element of investing.

For an equity investor, taking the inverse of the P/E ratio of a broad index like the S&P 500 and comparing it to the current yield on 10 year Treasuries is an old rule of thumb that was raised to the exalted status of a model (the Fed Model, in 1997). In the late nineties, the Fed Model was endowed with much more informative and predictive power than it deserved, especially considering the experience of the subsequent decade and a half.

But the Fed Model does yield one key observation: Treasuries are expensive relative to equities, or if you prefer, the price of borrowing to the US Government is dirt cheap.

Interest rates represent the price of money. If you want to use money, you have to pay that price. If you have money, it is the price you receive for letting someone else use it. How much depends on the usual rules of supply and demand but it is also highly segmented. Currently, the largest banks in the US can borrow almost unlimited amounts from the Federal Reserve for almost nothing while a consumer running a balance on a credit card may be looking at effective rates approaching 20%.

But the rates that are most appropriate for investing are the ones which drive investment and investment decisions. In this respect, the overnight rate from the Fed, the three month and 10 year Treasury rates are probably the top three rates to watch. Other rates are interesting and can potentially contain a tremendous amount of information for us to consider (junk spreads, Euro-zone differentials, emerging market spreads and inflation linked bonds to name just a few). But these three rates form the current basis for all those other rates.

The overnight rate (or more properly, the Fed Funds rate) is currently 0.25%. If you are one of the favored few banks that are allowed to do so, there is another rate (the discount window) which the Federal Reserve pays on idle funds. It currently stands at 0.75%. So, if you are wondering why the banks are making so much money these days while laying off entire business lines worth of staff, just think how many people you need to figure out whether one should borrow money at 0.25% and lend it back to the same institution at 0.75%, pocketing a risk-free positive carry of 0.5% with effectively no money down.