Changes to cellular lipids accompany shifts in microglial cell state, but the functional significance of these metabolic changes remains poorly understood. In human induced pluripotent stem cell-derived microglia, we observed that both extrinsic activation (by lipopolysaccharide treatment) and intrinsic triggers (the Alzheimer's disease-associated APOE4 genotype) result in accumulation of triglyceride-rich lipid droplets. We demonstrate that lipid droplet accumulation is not simply concomitant with changes in the cell state. In fact, both triglyceride biosynthesis and catabolism are critical for the activation-induced transcription and secretion of inflammatory cytokines and chemokines, as well as changes in phagocytosis. In microglia harboring the Alzheimer's disease risk APOE4 genotype, inhibiting triglyceride biosynthesis attenuates disease-associated transcriptional states. Triglyceride biosynthesis inhibition also rescues microglial surveillance defects observed in slices from APOE4 humanized transgenic mice. Together, our findings establish that modulating triglyceride metabolism can tune microglial immune activity in response to extrinsic activation and in APOE4-associated disease.