Making what he called "one of the most important appointments that any president can make," Obama Wednesday described Yellen as a tough and proven leader who "is exceptionally well qualified for this role."
Yellen, who currently serves as vice chair at the central bank, was not Obama's first choice. The President was reported to be keen on Larry Summers, who had served as his top economic adviser during the financial crisis.
However, Summers, a former Harvard president who also served as Treasury Secretary under President Bill Clinton, withdrew his name from consideration in mid September following backlash from some Senate Democrats over his alleged combative reputation.
Citing Yellen's years of experience in various Federal Reserve roles, as well as her meticulous research and economic forecasting skills, more than 500 economists had signed a letter urging Obama to nominate her for the top job.
Investors view Yellen as representing continuity for the Fed because her views are closely aligned with current chairman Ben Bernanke, whose second term ends Jan 31, according to CNN.
Like Bernanke, Yellen's main concern recently has been that high unemployment has persisted too long and could lead to permanent loss of skills for some workers. This viewpoint means she tends to lean in favour of continuing the Fed's stimulus efforts.
"While we have made progress, we have farther to go," Yellen said Wednesday. "The mandate of the Federal Reserve is to serve all the American people."
"And too many Americans still can't find a job, and worry how they'll pay their bills and provide for their families. The Federal Reserve can help if it does its job effectively."
The New York Times said Yellen's choice would reinforce the bank's change from an institution run by bureaucrats focused on inflation to one run by academics committed to a broader mission.