The endoplasmic reticulum is a cellular hub of lipid metabolism, coordinating lipid synthesis with continuous changes in metabolic flux. Maintaining ER lipid homeostasis despite these fluctuations is crucial to cell function and viability. Here, we identify a novel mechanism that is crucial for normal ER lipid metabolism and protects the ER from dysfunction. We identify the molecular function of the evolutionarily conserved ER protein FIT2 as a fatty acyl–coenzyme A (CoA) diphosphatase that hydrolyzes fatty acyl–CoA to yield acyl 4′-phosphopantetheine. This activity of FIT2, which is predicted to be active in the ER lumen, is required in yeast and mammalian cells for maintaining ER structure, protecting against ER stress, and enabling normal lipid storage in lipid droplets. Our findings thus solve the long-standing mystery of the molecular function of FIT2 and highlight the maintenance of optimal fatty acyl–CoA levels as key to ER homeostasis.