Obama announced the appointment of McDonough, who had been widely tipped to fill the vacancy created by Jack Lew's nomination as Treasury secretary, at a ceremony in the White House's ornate East Room.
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McDonough, a deputy national security adviser, takes on what is a mostly behind-the-scenes job but still considered one of Washington's most influential. The chief of staff acts as Oval Office gatekeeper and is a coordinator of domestic and foreign policymaking.
Obama's choice of McDonough – whom the president lauded as "one of my closest and most trusted advisers" – holds to a pattern of picking confidants and allies as he shuffles his inner circle for his second-term.
McDonough, 43, started out with Obama when he was a freshman US senator from Illinois and just beginning his rapid ascent on the national political scene.
McDonough, whose expertise is mostly in foreign policy, worked on Obama's 2008 presidential campaign and became a senior aide at the National Security Council when the president took office.
"Denis has played a key role in every major national security decision of my presidency: ending the war in Iraq, winding down the war in Afghanistan, and from our response to natural disasters around the world like Haiti and the tsunami in Japan, to the repeal of 'Don't Ask Don't Tell'," Obama said.
There had been some concern that McDonough's lack of a deep domestic policy background might be a handicap for him as chief of staff when fiscal matters, gun control and immigration are shaping up as Obama's top priorities. Obama has also signaled a possible push in the fight against climate change.
Reaching across isle
But McDonough's experience as a congressional staffer and the close contacts he retains on Capitol Hill were seen as a plus. He served as foreign policy adviser to former Senate Democratic leader Tom Daschle.
"Denis understands the importance of reaching across the aisle to deliver results for the American people," Obama said just four days after laying out an ambitious liberal agenda in his second inaugural address.
McDonough's main competition for the chief of staff job was Ron Klain, former chief of staff to Biden.
The chief of staff job is a high-pressure one, and Obama's has been a through a series of them since taking office.
Rahm Emanuel, now mayor of Chicago, led Obama's White House in the first half of his first term during fights over the economic stimulus package and healthcare reform.
Bill Daley, a Commerce secretary under Clinton, served as Obama's second chief of staff, after an interim filled by aide Pete Rouse. Daley was not a part of Obama's campaign-connected inner circle, however, and left after a year in the job.
Lew took over from Daley, who returned to Illinois. A popular and low-key chief, Lew served as a deputy to Secretary of State Hillary Clinton and as a budget director for Obama before taking his position in the West Wing.
AP and Reuters contributed to the report
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