One of the major adverse effects of glucocorticoid therapy is cutaneous atrophy, often followed by the development of resistance to steroids. It is accepted that epithelial stem cells (SCs) located in the hair follicle bulge divide during times of epidermal proliferative need. We determined whether follicular epithelial SCs and their transit amplifying progeny were stimulated to proliferate in response to the chronic application of glucocorticoid fluocinolone acetonide (FA). After first two applications of FA, keratinocyte proliferation in the interfollicular epidermis (IFE) and hair follicles was minimal and resulted in significant epidermal hypoplasia. We observed that a 50% depletion of the interfollicular keratinocyte population triggered a proliferative response. Unexpectedly, less than 2% of the proliferating keratinocytes were located in the bulge region of the hair follicle, whereas 82% were in IFE. It is known that cell desensitization to glucocorticoids is mediated via temporary decrease of glucocorticoid receptor (GR) expression. We found that GR expression was significantly decreased in IFE keratinocytes after each FA treatment. In contrast, many bulge keratinocytes retained GR in the nucleus. Our results indicate that bulge keratinocytes, including follicular SCs, are more sensitive to the antiproliferative effect of glucocorticoids than basal keratinocytes, possibly due to the incomplete process of desensitization.