Linear fixed point equations in Hilbert spaces naturally arise from the policy evaluation problem in reinforcement learning. We study methods that use a collection of random observations to compute approximate solutions by searching over a known low-dimensional subspace of the Hilbert space. First, we prove an instance-dependent upper bound on the mean-squared error for a linear stochastic approximation scheme that exploits Polyak--Ruppert averaging. This bound consists of two terms: an approximation error term with an instance-dependent approximation factor, and a statistical error term that captures the instance-specific complexity of the noise when projected onto the low-dimensional subspace. Using information-theoretic methods, we also establish lower bounds showing that the approximation factor cannot be improved, again in an instance-dependent sense. A concrete consequence of our characterization is that the optimal approximation factor in this problem can be much larger than a universal constant. We show how our results precisely characterize the error of a class of temporal difference learning methods for the policy evaluation problem with linear function approximation, establishing their optimality.