The move is the first in an expected overhaul of Mr Obama's national security team heading into his second term.
As the nation's top diplomat, Mr Kerry will not only be tasked with executing the president's foreign policy objectives, but will also have a hand in shaping them.
The long-time politician has been in lockstep with Mr Obama on issues such as nuclear non-proliferation, but ahead of the White House in advocating aggressive policies in Libya, Egypt and elsewhere that the president later embraced.
"He is not going to need a lot of on-the-job training," Mr Obama said, standing alongside Mr Kerry, 69, in a White House ceremony. "Few individuals know as many presidents and prime ministers or grasp our foreign policies as firmly as John Kerry."
He is expected to win confirmation easily in the Senate, where he has served since 1985, the last six years as chairman of the Foreign Relations Committee.
Mr Kerry would take the helm at the State Department from Hillary Clinton, who plans to leave the administration early next year. Mrs Clinton, recovering from concussion sustained in a fall, did not attend the White House event.
In a statement she said, "John Kerry has been tested - in war, in government, and in diplomacy. Time and again, he has proven his mettle."
Mr Obama settled on Mr Kerry for the job even though it could cause a political problem for Democrats in Massachusetts. Mr Kerry's move to State would open the Senate seat he has held for five terms, giving Republicans an opportunity to take advantage.
Mr Kerry would join a national security team in flux, with Obama expected to choose a new defence secretary and director of the Central Intelligence Agency in the coming weeks. He already has deep relationships with many world leaders, formed both during his Senate travels and as an unofficial envoy for Mr Obama.