Type I interferon (IFN) protects against viruses, yet it also has a poorly understood suppressive influence on inflammation. Here, we report that activated mouse macrophages lacking the IFN-stimulated gene cholesterol 25-hydroxylase (Ch25h) and that are unable to produce the oxysterol 25-hydroxycholesterol (25-HC) overproduce inflammatory interleukin-1 (IL-1) family cytokines. 25-HC acts by antagonizing sterol response element–binding protein (SREBP) processing to reduce Il1b transcription and to broadly repress IL-1–activating inflammasomes. In accord with these dual actions of 25-HC, Ch25h-deficient mice exhibit increased sensitivity to septic shock, exacerbated experimental autoimmune encephalomyelitis, and a stronger ability to repress bacterial growth. These findings identify an oxysterol, 25-HC, as a critical mediator in the negative-feedback pathway of IFN signaling on IL-1 family cytokine production and inflammasome activity.