Most lenders are expecting the Federal Open Market Committee to push interest rates down later this month, but they are not especially excited about the prospect.

"I don't think a rate cut is going to make much of a difference," said Richard Roberts, executive vice president and treasurer for Wachovia Corp. The Federal Reserve does not even need to lower rates, he said. "The bond market's recent weakness is due to debt ceiling and budget negotiations" rather than high rates, he explained.

Corporate downsizing and lack of job security are affecting the homebuyer market more than interest rates, a spokesman from Fleet Mortgage Group said. Individuals are more likely to wait until they are a little more secure to purchase a home, he said.

Additionally, a drop of 25 basis points would only increase refinancing volume from 42% to 45% of Fleet's total originations, he said.

With a reduction in interest rates, "We would expect an increase in refinance activity," said Don Britton, executive vice president of Old Kent Mortgage Co., Grand Rapids, Mich. Refinancing volume could go from 35% to 50% of Old Kent's total origination volume if rates drop 25 basis points, he said.

But a further reduction of 25 basis points in March may not have an extensive effect, he added, as the current refinancing upswing represents the second such round in the past three years.

Economists seem fairly certain that the Federal Reserve will decide to reduce rates if the budget is balanced in the near future.

Some even foresee a substantial decrease by spring. "We're looking at a 5% federal funds rate by the end of March," said Mitchell J. Held, chief financial economist for Smith Barney & Co.

The Federal Reserve seems to be hinting at the possibility.

"We need a preemptive approach (to the economy)," William J. McDonough, president of the Federal Reserve Bank of New York, told mortgage bankers at the Mortgage Bankers Association's senior executives conference last week. Overheating the economy has more of severe effect on inflation than instigating a slowdown does on recession, he explained.

"Inflation is the lowest it has been since the 1960s," Mr. McDonough said, "but people are still worried about price increases and it is effecting spending habits."

Housing affordability is enhanced by lower interest rates, he said, and as they drop, less income is necessary to qualify for a home purchase.

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