"We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again," Yellen said in a statement. "The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers."
The central bank, in citing the Wells Fargo's board for failing to oversee the bank, ordered the San Francisco-based company to replace four members of its 16-person board by the end of the year. John Stumpf earlier resigned as chairman and CEO.
The Fed is requiring Wells Fargo to improve its governance and risk management processes, including better oversight by its board of directors.
"Until the firm makes sufficient improvements, it will be restricted from growing any larger than its total asset size as of the end of 2017," the Fed said in a release.
Over the last two years, Wells Fargo opened dummy accounts in customers' names and forced some to take out unnecessary auto insurance. Wells Fargo estimated the number of fake accounts was 3.5 million. Last year, the bank paid $185 million to regulators and settled a class-action suit for $142 million.
"Wells Fargo pursued a business strategy that prioritized its overall growth without ensuring appropriate management of all key risks," the Fed said in the release. "The firm did not have an effective firm-wide risk management framework in place that covered all key risks. This prevented the proper escalation of serious compliance breakdowns to the board of directors."
Wells Fargo had nearly $2 trillion in assets at the end of 2017.
The bank will still be allowed to conduct current activities, including accepting customer deposits and making consumer loans.
The Fed's regulators have penalized others banks for misconduct, but hasn't imposed strict limits on a major bank's growth.
"I don't remember the last time the board has ever done anything quite as dramatic as that," Evan Stewart, a regulatory lawyer at the law firm Cohen and Gresser, told The New York Times. "It's really quite a dramatic intervention by the major federal regulatory agency in the governance of a major bank."
Wells Fargo has grown over the years, acquiring Wachovia in late 2008, and was considered one of the country's strongest, best-run institutions.
On Jan. 12, the bank reported net income of $21.9 billion, compared with $21.9 in 2016.
"The bank is lucky it is too big to shut down," said Erik Gordon, a professor at the University of Michigan's Ross School of Business. "A smaller bank might have lost its banking licenses."
Wells Fargo, in a release Friday, said it would submit a plan to the Fed within 60 days for improving its board oversight and risk management practices. It will also submit to an independent third-party review that will be completed by the end of September.
"We take this order seriously and are focused on addressing all of the Federal Reserve's concerns," said Timothy J. Sloan, Wells Fargo's president and CEO. "It is important to note that the consent order is not related to any new matters, but to prior issues where we have already made significant progress. We appreciate the Federal Reserve's acknowledgment of our actions to date. In addition, the order is not related to Wells Fargo's financial condition -- we remain in a strong financial position and stand ready to serve the varied financial needs of our customers."
Wells Fargo's actions have been criticized by political rivals.
Sen. Elizabeth Warren, D-Mass., tweeted Friday: "Chair Yellen's decision today to freeze the growth of Wells Fargo until it shapes up also demonstrates that we have the tools to rein in Wall Street - if our regulators have the guts to use them. This one hits them where it hurts."