Yellen will replace the outgoing Ben Bernanke at the end of January subject to approval by the US Senate, a White House spokesman confirmed early this morning.
She is currently vice-chairman of the central bank and is expected to stick with monetary stimulus policies similar to those of her predecessor.
Obama is scheduled to confirm the nomination in a White House press conference this afternoon, where he will stand alongside Yellen and Bernanke.
The timing of the announcement is notable because the US federal government is currently in shutdown, due to a dispute between Obama and Republican politicians over the country’s debt ceiling.
White House officials will hope that the decision to push ahead with the appointment during a time of crisis will portray the President as concentrating on major economic decisions, in contrast to bickering Republicans on Capitol Hill.
Although not close to the President, Yellen’s chances of taking the top job were boosted this summer when prominent US senators signed a letter urging Obama to nominate her for the position.
The President had initially hoped to appoint his former economic adviser Lawrence Summers to the job. But Summers officially withdrew himself from consideration earlier this month after key Democratic senators indicated that they would attempt to block his nomination, setting the scene for a bruising confirmation process.
Yellen, 67 years old, has 15 years of experience at the Fed and served as president of the Federal Reserve Bank of San Francisco between 2004 and 2010 before becoming Bernanke’s vice-chairman.
She studied at Brown and Yale universities, and later taught at Harvard and the London School of Economics.
Bernanke will step down after serving two full terms as Fed chair, having taken up the post in 2006 and steered the US through one of the world’s worst ever financial crises. He surprised the markets last month by keeping the Fed’s stimulus programme running at full tilt, rather than starting to taper bond purchases.