Chronic viral infections and malignant tumours induce T cells that have a reduced ability to secrete effector cytokines and have upregulated expression of the inhibitory receptor PD1 (programmed cell death protein 1). These features have so far been considered to mark terminally differentiated 'exhausted' T cells. However, several recent clinical and experimental observations indicate that phenotypically exhausted T cells can still mediate a crucial level of pathogen or tumour control. In this Opinion article, we propose that the exhausted phenotype results from a differentiation process in which T cells stably adjust their effector capacity to the needs of chronic infection. We argue that this phenotype is optimized to cause minimal tissue damage while still mediating a critical level of pathogen control. In contrast to the presently held view of functional exhaustion, this new concept better reflects the pathophysiology and clinical manifestations of persisting infections, and it provides a rationale for emerging therapies that enhance T cell activity in chronic infection and cancer by blocking inhibitory receptors.