The 21-year-old midfielder linked up with the Eagles on a season-long agreement over the summer in an effort to find regular game time.
With his path blocked at Stamford Bridge, it was felt that his development would be better served elsewhere – while still operating in a Premier League environment.
Loftus-Cheek has impressed for Palace, earning senior England international recognition in the process, and Hodgson has confirmed that Chelsea can take him back.
He told reporters ahead of a goal-scoring showing from the youngster in a 2-1 victory over Stoke: "I have a feeling that they have the right to call him back if he is not playing enough games or featuring in enough games, which is a good clause.
"If you are loaning out players who you believe in to get playing time, and the clubs aren't using the player, then I think you are entitled to bring them back.
"I think that clause exists. That is, I suppose, a risk for us. If we suddenly decide we don’t want to use him then he could go back."
Loftus-Cheek was sidelined in September by injury but has figured in nine of Palace’s 13 Premier League games this season.
"We are enjoying having him with us and using him in our team, so I don’t think I have to fear that at this moment in time," added Hodgson on the threat of losing a highly-rated talent.
Chelsea, though, are keeping a close eye on Loftus-Cheek’s situation , with Brazilian forward Willian among those to suggest that a talented academy graduate should never have been allowed to leave.
He recently said: "I don't know why he is at Crystal Palace now. I don't know why.
"He has to come back! He is strong, he has quality. He has a great future."
Chelsea have struggled for consistency in the middle of the park this season, with Danny Drinkwater enduring fitness struggles while fellow big-money summer signing Tiemoue Bakayoko is yet to justify his €45 million price tag.