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Psychosis has been proposed to develop from dysfunction in a hippocampal-striatal-midbrain circuit, leading to aberrant salience processing. Here, we used functional magnetic resonance imaging (fMRI) during novelty salience processing to investigate this model in people at clinical high risk (CHR) for psychosis according to their subsequent clinical outcomes. Seventy-six CHR participants as defined using the Comprehensive Assessment of At-Risk Mental States (CAARMS) and 31 healthy controls (HC) were studied while performing a novelty salience fMRI task that engaged an a priori hippocampal-striatal-midbrain circuit of interest. The CHR sample was then followed clinically for a mean of 59.7 months (~5 y), when clinical outcomes were assessed in terms of transition (CHR-T) or non-transition (CHR-NT) to psychosis (CAARMS criteria): during this period, 13 individuals (17%) developed a psychotic disorder (CHR-T) and 63 did not. Functional activation and effective connectivity within a hippocampal-striatal-midbrain circuit were compared between groups. In CHR individuals compared to HC, hippocampal response to novel stimuli was significantly attenuated (P = .041 family-wise error corrected). Dynamic Causal Modelling revealed that stimulus novelty modulated effective connectivity from the hippocampus to the striatum, and from the midbrain to the hippocampus, significantly more in CHR participants than in HC. Conversely, stimulus novelty modulated connectivity from the midbrain to the striatum significantly less in CHR participants than in HC, and less in CHR participants who subsequently developed psychosis than in CHR individuals who did not become psychotic. Our findings are consistent with preclinical evidence implicating hippocampal-striatal-midbrain circuit dysfunction in altered salience processing and the onset of psychosis.