The unfolded protein response (UPR) is an intracellular signaling pathway that counteracts variable stresses that impair protein folding in the endoplasmic reticulum (ER). As such, the UPR is thought to be a homeostat that finely tunes ER protein folding capacity and ER abundance according to need. The mechanism by which the ER stress sensor Ire1 is activated by unfolded proteins and the role that the ER chaperone protein BiP plays in Ire1 regulation have remained unclear. Here we show that the UPR matches its output to the magnitude of the stress by regulating the duration of Ire1 signaling. BiP binding to Ire1 serves to desensitize Ire1 to low levels of stress and promotes its deactivation when favorable folding conditions are restored to the ER. We propose that, mechanistically, BiP achieves these functions by sequestering inactive Ire1 molecules, thereby providing a barrier to oligomerization and activation, and a stabilizing interaction that facilitates de-oligomerization and deactivation. Thus BiP binding to or release from Ire1 is not instrumental for switching the UPR on and off as previously posed. By contrast, BiP provides a buffer for inactive Ire1 molecules that ensures an appropriate response to restore protein folding homeostasis to the ER by modulating the sensitivity and dynamics of Ire1 activity.