Yellen, who currently holds the No. 2 spot at the Fed, would replace Ben Bernanke, whose eight-year tenure at the helm of the Fed ends Jan. 31.
Obama introduced Yellen as a "proven leader." ''And she's tough, not just because she's from Brooklyn," he said. He credited her for being a consensus builder, adding: "She understands the human cost when people can't find a job."
Before selecting Yellen, Obama had considered nominating former Treasury Secretary Lawrence Summers, who had been a close Obama adviser during the first years of his presidency. But Summers withdrew in the face of opposition over his temperament and past support for bank deregulation.
Obama heaped praise on Bernanke for taking "bold action" at the height of the financial crisis in 2008 to "shore up our banks and get credit flowing again."
"Ben Bernanke is the epitome of calm, and against the volatility of global markets he's been a voice of wisdom and a steady hand," Obama said.
The central bank reaches into the lives of millions of Americans. Its two main missions are fostering maximum employment and stabilizing prices. With its power to regulate the supply of money and set interest rates, it influences economic activity, hiring and inflation. It also is the leading regulator of banks and plays a crucial role as the country's lender of last resort when banks can't get their money elsewhere.
In accepting the nomination, Yellen said more still needs to be done to strengthen the recovery. She said the past six years have been tumultuous for the economy and challenging for many Americans. She said that while the recovery is not complete, "we have made progress, the economy is stronger and the financial system is sounder."