Muñoz's work will entail coordinating the development of domestic policies and supervising their execution, according to an official communique.
Muñoz, until now White House director of Intergovernmental Affairs and charged with coordinating relations with state and local governments, will replace Melody Barnes as head of domestic policy.
"Over the past three years, Cecilia has been a trusted adviser who has demonstrated sound judgment day in and day out," Obama said, hailing Muñoz's work "on behalf of middle class families."
"I'm confident she'll bring the same unwavering dedication to her new position," the president said.
Born in Detroit to Bolivian immigrant parents, Muñoz became an expert in immigration policy while working for La Raza, the country's largest Hispanic civil rights organization.
Obama hopes that Hispanics, who gave him valuable support in the 2008 campaign, will back his bid for reelection in November.
But some in the Hispanic community have expressed their dissatisfaction with the president, who promised comprehensive immigration reform but has yet to deliver.