Converging evidence from preclinical studies indicates that dysfunction of the gamma-aminobutyric acidergic (GABAergic) neurotransmitter system plays a major role in the pathophysiology of schizophrenia. Despite the improved methods and reliability of neuroimaging measurements, which have recently facilitated testing predictions from animal models in humans, the extent to which GABAergic neurotransmission is altered in patients with psychosis is less clear. Furthermore, although preclinical evidence suggests that decreased cortical interneuron function leads to hippocampal activity overdrive, no study has explicitly investigated the relationship between neurotransmission and neurophysiology in humans. Here we show that prefrontal GABA function is reduced in individuals at ultra high risk of developing psychosis and that this reduction is related to hippocampal (and nominally to prefrontal) resting activity. These findings shed light on the pathophysiology of vulnerability for schizophrenia by showing that alterations in GABAergic systems have downstream effects on hippocampus before the onset of psychosis.