Bill Daley, 62, will replace another Chicagoan, Rahm Emanuel, who left the post to run for mayor. He'll also replace interim chief of staff Pete Rouse.
Rouse, who did not want to stay in the job and recommended Daley for it, will remain at the White House in a senior position as counselor to Obama.
"Few Americans can boast the breadth of experience that Bill brings to this job," Obama said in an official announcement Thursday at the White House. "But most of all, I know Bill to be somebody who cares deeply about this country."
It doesn't come as a big surprise given that Daley was at the White House Wednesday. He had said that if offered the job, he would take it.
The younger brother of Mayor Richard M. Daley always had one foot in Chicago and one foot in Washington. Under the Clinton administration, Bill Daley headed the campaign to pass NAFTA and later served as commerce secretary. In 2000, he ran Al Gore's unsuccessful presidential campaign.
Since then, he has been the Midwest chief for JPMorgan Chase.
"I'm convinced that he'll help us in our mission of growing our economy and moving America forward," Obama said.
"This team will not let you down -- nor the nation," Daley told the president.
This is not the first time Daley has worked for Obama. He oversaw Obama's transition two years ago.
Daley has been known to say that in order for Obama to get re-elected, he needs to move more to the center.
Daley's appointment is expected to please centrists and Republicans, but it may not excite liberal Democrats.
Sen. Mark Kirk, R-Ill., said he was thrilled with the idea since Daley is very pro-business.
"Unlike many Democratic leaders, he actually is in the private sector, understands the business climate and how bad it has been, understands how to meet a payroll and how bad all of these new taxes and regulations are, and so having someone who has actually had to meet a payroll and expand business next to the president is a good thing," Kirk said.
Rep. Jan Schakowsky, D-Ill., was more lukewarm about the appointment.
"He certainly has the gravitas to deal with the staff, and if he has the confidence of the president, I think it could be a good thing," Schakowsky told ABC7 Chicago.
His brother, Richard Daley, is the mayor of Chicago, the post that Obama's first chief of staff, Rahm Emanuel, left his job in October to seek. The Daley brothers are sons of Richard J. Daley, who was Chicago's mayor from 1955 to his death in 1976.
Mayor Daley said the president's choice is the perfect fit.
"First of all, he brings experience in the private and public sector. He has passion. He understands that government should serve people, it shouldn't serve the bureaucracy," the mayor said.
Bill Daley said said he vividly remembers his first trip to the White House 50 years ago.
"I visited the White House with my parents. My brothers and sisters visited a young president who went on to show great strength, leadership and vision in the face of enormous challenges," Daley said in reference to President John F. Kennedy.
Daley was expected to start as chief of staff within the next couple of weeks.
The chief of staff is considered one of the most important and influential jobs in American government.
Chicagoans react to Bill Daley appointment
Reaction in Chicago was favorable to President Obama's selection of Bill Daley.
Mayoral candidate Rahm Emanuel laughed Thursday morning when a reporter noted that while Emanuel tries to replace one Daley, another Daley will replace him.
Emanuel called Bill Daley a friend but declined comment because the president hadn't yet announced the appointment.
Veteran political consultant Peter Giangreco with Strategy Group praised Daley.
"Bill's one of those guys who has tremendous stature, and yet is open and willing to listen to good ideas no matter where they come from, from the left or the right, from Democrats or Republicans. And I think that's exactly the kind of balance the President's looking for right now," said Giangreco.
Cook County Commissioner John Daley said, "I am very proud of my brother and for the whole Daley family. Bill will do an outstanding job for the president of the United States."
Northwest Side congressman Mike Quigley commented, "The White House chief of staff needs to be someone who can work in a bipartisan manner amidst competing agendas, and bill has proven he can do that. I think the president made a good choice."
The Associated Press contributed to this report.