A scathing report was released on Friday after a year-long probe into the police force found serious civil rights abuses.
The 2015 inquiry was launched after fallout over the release of dashcam video showing a white officer shooting black teenager Laquan McDonald.
The city agreed to enter negotiations on a consent decree to guide reform.
US Attorney General Loretta Lynch announced Chicago would work with the Department of Justice on a consent decree, which would commit the city to sweeping reforms within the police department to restore public trust.
The 13-month investigation found improper training as one of the main causes of civil rights violations.
It also concluded the city lacked community policing and failed to provide officers with the support they need.
“The resulting deficit in trust and accountability is not just bad for residents – it’s also bad for dedicated police officers trying to do their jobs safely and effectively,” Ms Lynch said at a news conference.
She added the report laid “the groundwork for the difficult but necessary work of building a stronger, safer and more united Chicago for all who call it home”.
The nation’s third largest police department came under fire in 2015 after a court ordered the city to release dashcam footage showing Officer Jason Van Dyke shooting Mr McDonald 16 times.
The 2014 video of the 17-year-old’s death, which the city attempted to keep from public release, sparked heated protests and added to national outrage over the police use of excessive force against African Americans.
Mr Van Dyke was charged with first-degree murder in 2015 and is facing trial.
Principal Deputy Assistant Attorney General Vanita Gupta, who leads the Justice Department’s civil rights division, added the probe found Chicago officers had shot people who presented no clear danger.
Chicago is one of dozens of cities to undergo a federal civil rights investigation under the Obama administration, which has made police reform a priority amid mounting racial tensions across the country.
The Justice Department has conducted 25 such probes in cities rife with police brutality allegations including Ferguson, Missouri, Baltimore and Cleveland.
Earlier this week, Baltimore officials announced the city had reached a consent decree agreement with the Justice Department requiring police to make changes to its practices.
But it is unclear whether President-elect Donald Trump will continue the Justice Department’s police investigations once he takes office next week.
Alabama Senator Jeff Sessions, Mr Trump’s nominee for attorney general, said at his Senate confirmation hearing on Tuesday that such investigations “can undermine respect for police officers”.
The president-elect has also advocated for aggressive policing.