diff --git a/web/src/channel_folders.ts b/web/src/channel_folders.ts
index 0e55a011dc..2627b8e8d4 100644
--- a/web/src/channel_folders.ts
+++ b/web/src/channel_folders.ts
@@ -8,6 +8,9 @@ export type ChannelFolder = z.infer<typeof channel_folder_schema>;
 let channel_folder_name_dict: FoldDict<ChannelFolder>;
 let channel_folder_by_id_dict: Map<number, ChannelFolder>;
 
+export const MAX_CHANNEL_FOLDER_NAME_LENGTH = 100;
+export const MAX_CHANNEL_FOLDER_DESCRIPTION_LENGTH = 1024;
+
 export function add(channel_folder: ChannelFolder): void {
     channel_folder_name_dict.set(channel_folder.name, channel_folder);
     channel_folder_by_id_dict.set(channel_folder.id, channel_folder);
diff --git a/web/src/server_events_dispatch.js b/web/src/server_events_dispatch.js
index 5a985e3384..8a957bd450 100644
--- a/web/src/server_events_dispatch.js
+++ b/web/src/server_events_dispatch.js
@@ -9,6 +9,7 @@ import * as blueslip from "./blueslip.ts";
 import * as bot_data from "./bot_data.ts";
 import * as browser_history from "./browser_history.ts";
 import {buddy_list} from "./buddy_list.ts";
+import * as channel_folders from "./channel_folders.ts";
 import * as compose_call from "./compose_call.ts";
 import * as compose_call_ui from "./compose_call_ui.ts";
 import * as compose_closed_ui from "./compose_closed_ui.ts";
@@ -113,6 +114,18 @@ export function dispatch_normal_event(event) {
             attachments_ui.update_attachments(event);
             break;
 
+        case "channel_folder":
+            switch (event.op) {
+                case "add": {
+                    channel_folders.add(event.channel_folder);
+                    break;
+                }
+                default:
+                    blueslip.error("Unexpected event type channel_folder/" + event.op);
+                    break;
+            }
+            break;
+
         case "custom_profile_fields":
             realm.custom_profile_fields = event.fields;
             settings_profile_fields.populate_profile_fields(realm.custom_profile_fields);
diff --git a/web/src/stream_edit.ts b/web/src/stream_edit.ts
index d8deac1cf9..9375fff0df 100644
--- a/web/src/stream_edit.ts
+++ b/web/src/stream_edit.ts
@@ -10,6 +10,7 @@ import render_inline_decorated_channel_name from "../templates/inline_decorated_
 import render_change_stream_info_modal from "../templates/stream_settings/change_stream_info_modal.hbs";
 import render_confirm_stream_privacy_change_modal from "../templates/stream_settings/confirm_stream_privacy_change_modal.hbs";
 import render_copy_email_address_modal from "../templates/stream_settings/copy_email_address_modal.hbs";
+import render_create_channel_folder_modal from "../templates/stream_settings/create_channel_folder_modal.hbs";
 import render_stream_description from "../templates/stream_settings/stream_description.hbs";
 import render_stream_settings from "../templates/stream_settings/stream_settings.hbs";
 
@@ -17,6 +18,7 @@ import * as blueslip from "./blueslip.ts";
 import type {Bot} from "./bot_data.ts";
 import * as browser_history from "./browser_history.ts";
 import * as channel from "./channel.ts";
+import * as channel_folders from "./channel_folders.ts";
 import * as confirm_dialog from "./confirm_dialog.ts";
 import {show_copied_confirmation} from "./copied_tooltip.ts";
 import * as dialog_widget from "./dialog_widget.ts";
@@ -920,4 +922,58 @@ export function initialize(): void {
             }
         },
     );
+
+    $("#channels_overlay_container").on("click", ".create-channel-folder-button", () => {
+        const html_body = render_create_channel_folder_modal({
+            max_channel_folder_name_length: channel_folders.MAX_CHANNEL_FOLDER_NAME_LENGTH,
+            max_channel_folder_description_length:
+                channel_folders.MAX_CHANNEL_FOLDER_DESCRIPTION_LENGTH,
+        });
+
+        function create_channel_folder(): void {
+            const close_on_success = true;
+            const data = {
+                name: $<HTMLInputElement>("input#new_channel_folder_name").val()!.trim(),
+                description: $<HTMLTextAreaElement>("textarea#new_channel_folder_description")
+                    .val()!
+                    .trim(),
+            };
+            dialog_widget.submit_api_request(
+                channel.post,
+                "/json/channel_folders/create",
+                data,
+                {
+                    success_continuation(response_data) {
+                        const id = z
+                            .object({channel_folder_id: z.number()})
+                            .parse(response_data).channel_folder_id;
+                        // This is a temporary channel folder object added
+                        // to channel folders data, so that the folder is
+                        // immediately visible in the dropdown.
+                        // This will be replaced with the actual object once
+                        // the client receives channel_folder/add event.
+                        const channel_folder = {
+                            id,
+                            name: data.name,
+                            description: data.description,
+                            is_archived: false,
+                            rendered_description: "",
+                            date_created: 0,
+                            creator_id: people.my_current_user_id(),
+                        };
+                        channel_folders.add(channel_folder);
+                    },
+                },
+                close_on_success,
+            );
+        }
+        dialog_widget.launch({
+            html_heading: $t_html({defaultMessage: "Create channel folder"}),
+            html_body,
+            id: "create_channel_folder",
+            html_submit_button: $t_html({defaultMessage: "Create"}),
+            on_click: create_channel_folder,
+            loading_spinner: true,
+        });
+    });
 }
diff --git a/web/src/stream_settings_ui.ts b/web/src/stream_settings_ui.ts
index 5774bceb31..30a1c27d87 100644
--- a/web/src/stream_settings_ui.ts
+++ b/web/src/stream_settings_ui.ts
@@ -869,6 +869,7 @@ function setup_page(callback: () => void): void {
             group_setting_labels: settings_config.all_group_setting_labels.stream,
             realm_has_archived_channels,
             has_billing_access: settings_data.user_has_billing_access(),
+            is_admin: current_user.is_admin,
         };
 
         const rendered = render_stream_settings_overlay(template_data);
diff --git a/web/styles/subscriptions.css b/web/styles/subscriptions.css
index f9aee8f0bf..43e92d9d10 100644
--- a/web/styles/subscriptions.css
+++ b/web/styles/subscriptions.css
@@ -1323,7 +1323,8 @@ div.settings-radio-input-parent {
 }
 
 #change_user_group_description,
-#change_stream_description {
+#change_stream_description,
+#new_channel_folder_description {
     width: 100%;
     height: 80px;
     margin-bottom: 4px;
@@ -1359,6 +1360,15 @@ div.settings-radio-input-parent {
 }
 
 #subscription_overlay .channel-folder-widget-container {
+    display: flex;
+    gap: 0.5em;
+    width: auto;
+    /* Set minimum width such that the total width of dropdown
+    button and "Create folder" button is at least equal to the
+    minimum width of pill inputs for permission settings. */
+    min-width: var(--modal-input-width);
+    flex-wrap: wrap;
+
     .dropdown_widget_value {
         overflow: hidden;
         text-overflow: ellipsis;
diff --git a/web/templates/stream_settings/create_channel_folder_modal.hbs b/web/templates/stream_settings/create_channel_folder_modal.hbs
new file mode 100644
index 0000000000..229ee02905
--- /dev/null
+++ b/web/templates/stream_settings/create_channel_folder_modal.hbs
@@ -0,0 +1,12 @@
+<div>
+    <label for="new_channel_folder_name" class="modal-field-label">
+        {{t 'Channel folder name' }}
+    </label>
+    <input type="text" id="new_channel_folder_name" class="modal_text_input" name="channel_folder_name" maxlength="{{ max_channel_folder_name_length }}" />
+</div>
+<div>
+    <label for="new_channel_folder_description" class="modal-field-label">
+        {{t 'Description' }}
+    </label>
+    <textarea id="new_channel_folder_description" class="settings_textarea" name="channel_folder_description" maxlength="{{ max_channel_folder_description_length }}"></textarea>
+</div>
diff --git a/web/templates/stream_settings/stream_settings.hbs b/web/templates/stream_settings/stream_settings.hbs
index d4ef85bdcd..a133baaf49 100644
--- a/web/templates/stream_settings/stream_settings.hbs
+++ b/web/templates/stream_settings/stream_settings.hbs
@@ -88,6 +88,7 @@
               prefix="id_"
               group_setting_labels=../group_setting_labels
               channel_folder_widget_name="folder_id"
+              is_admin=../is_admin
               }}
             {{/with}}
             <div class="stream_details_box">
diff --git a/web/templates/stream_settings/stream_types.hbs b/web/templates/stream_settings/stream_types.hbs
index 719b8f52f9..493ae32a99 100644
--- a/web/templates/stream_settings/stream_types.hbs
+++ b/web/templates/stream_settings/stream_types.hbs
@@ -52,12 +52,26 @@
     </div>
 
     <div class="input-group channel-folder-container">
+        {{!-- This is a modified version of dropdown_widget_with_label.hbs
+        component so that we can show dropdown button and button to create
+        a new folder on same line without having to add much CSS with
+        hardcoded margin and padding values. --}}
         <label class="settings-field-label" for="{{channel_folder_widget_name}}_widget">
             {{t "Channel folder"}}
         </label>
         <span class="prop-element hide" id="id_{{channel_folder_widget_name}}" data-setting-widget-type="dropdown-list-widget" data-setting-value-type="number"></span>
         <div class="dropdown_widget_with_label_wrapper channel-folder-widget-container">
             {{> ../dropdown_widget widget_name=channel_folder_widget_name}}
+
+            {{#if is_admin}}
+                {{> ../components/action_button
+                  label=(t "Create new folder")
+                  attention="quiet"
+                  intent="neutral"
+                  type="button"
+                  custom_classes="create-channel-folder-button"
+                  }}
+            {{/if}}
         </div>
     </div>
 </div>
diff --git a/web/tests/dispatch.test.cjs b/web/tests/dispatch.test.cjs
index 38772e8a73..c86d491e8c 100644
--- a/web/tests/dispatch.test.cjs
+++ b/web/tests/dispatch.test.cjs
@@ -137,6 +137,7 @@ page_params.test_suite = false;
 
 // For data-oriented modules, just use them, don't stub them.
 const alert_words = zrequire("alert_words");
+const channel_folders = zrequire("channel_folders");
 const emoji = zrequire("emoji");
 const message_store = zrequire("message_store");
 const people = zrequire("people");
@@ -487,6 +488,23 @@ run_test("scheduled_messages", ({override}) => {
     }
 });
 
+run_test("channel_folders", () => {
+    channel_folders.initialize({channel_folders: []});
+
+    const event = event_fixtures.channel_folder__add;
+    {
+        dispatch(event);
+
+        const folders = channel_folders.get_channel_folders();
+        assert.equal(folders.length, 1);
+        assert.equal(folders[0].id, event.channel_folder.id);
+        assert.equal(folders[0].name, event.channel_folder.name);
+    }
+
+    blueslip.expect("error", "Unexpected event type channel_folder/other");
+    server_events_dispatch.dispatch_normal_event({type: "channel_folder", op: "other"});
+});
+
 run_test("realm settings", ({override}) => {
     override(current_user, "is_admin", true);
     override(realm, "realm_date_created", new Date("2023-01-01Z"));
diff --git a/web/tests/lib/events.cjs b/web/tests/lib/events.cjs
index 38847b8658..987ab05268 100644
--- a/web/tests/lib/events.cjs
+++ b/web/tests/lib/events.cjs
@@ -137,6 +137,20 @@ exports.fixtures = {
         upload_space_used: 90000,
     },
 
+    channel_folder__add: {
+        type: "channel_folder",
+        op: "add",
+        channel_folder: {
+            id: 1,
+            name: "Frontend",
+            description: "Channels for frontend discussions",
+            rendered_description: "<p>Channels for frontend discussions</p>",
+            date_created: 1681662420,
+            creator_id: 10,
+            is_archived: false,
+        },
+    },
+
     channel_typing_edit_message__start: {
         type: "typing_edit_message",
         op: "start",