Pull off some wool and place it across the Peep cookie cutter.
Add a layer of wool in the opposite direction. Then take a felting needle and poke the wool inside of the cookie cutter. Be sure to carefully stab all along the inside edge - this will help define the shape.
Add more layers of wool until you can no longer see through the wool.
Once you have the bottom half complete, fill it with catnip. Be sure to keep it in the middle of the felt cat toy so that it doesn't poke through the edge.
Cover the catnip with more layers of wool. Use the felting needle to felt the wool, just as with the first layer. Again, add layers until you can no longer see the catnip through the wool.
When the cat toy feels solid, take it out of the cookie cutter. Stab it all over with the felting needle until the wool is nice and compact. Be sure to focus on the indents and edges to define them.
Then the only thing that's left to do is give your DIY catnip toy to the cat.