Chronic changes in excitability and activity can induce homeostatic plasticity. These perturbations may be associated with neurological disorders, particularly those involving loss or dysfunction of GABA interneurons. In distal-less homeobox 1 (Dlx1(-/-)) mice with late-onset interneuron loss and reduced inhibition, we observed both excitatory synaptic silencing and decreased intrinsic neuronal excitability. These homeostatic changes do not fully restore normal circuit function, because synaptic silencing results in enhanced potential for long-term potentiation and abnormal gamma oscillations. Transplanting medial ganglionic eminence interneuron progenitors to introduce new GABAergic interneurons, we demonstrate restoration of hippocampal function. Specifically, miniature excitatory postsynaptic currents, input resistance, hippocampal long-term potentiation, and gamma oscillations are all normalized. Thus, in vivo homeostatic plasticity is a highly dynamic and bidirectional process that responds to changes in inhibition.