Rare earths are 17 chemically similar elements crucial to making many hi-tech products, such as phones and PCs.
The Critical Materials Institute will be located in Ames, Iowa.
The US wants to reduce its dependency on China, which produces more than 95% of the world's rare earth elements, and address local shortages.
According to the US Geological Survey, there may be deposits of rare earths in 14 US states.
Besides being used for hi-tech gadgets, the elements are also crucial for manufacturing low-carbon resources such as wind turbines, solar panels and electric cars, said David Danielson, the US assistant secretary for renewable energy.