The former Chelsea star has agreed personal terms on a four-year contract and will undergo a medical over the next two days before the deal is officially concluded.
Cole - heavily linked with Arsenal and Tottenham - will bring some much-needed creativity to a side which was sadly lacking in that department last season when they finished a disappointing seventh in the Premier League.
However, irrespective of the talents of the 28-year-old - and they are considerable - his signing is seen as a statement of intent by Hodgson.
The former Fulham manager took over from Rafael Benitez at the start of the month but many questioned whether he had the necessary star quality, combined with a lack of Champions League football, to attract the marquee signings required to get the club back on its feet again.
Even before last season had ended, Fernando Torres spoke out about the need to bring in four or five quality players while speculation about Steven Gerrard's future, having again been linked with a move to Real Madrid, began to grow.
Securing the services of Cole, the biggest free transfer available this summer, will go some way to placating Torres while Gerrard will no doubt appreciate playing alongside an England team-mate.
Liverpool's record goalscorer Ian Rush believes the signing has only enhanced Hodgson's reputation - even before a ball has been kicked.
"Liverpool might not have been successful as we would have liked to have been recently but this shows we can still attract top name players, whether that's an England international or a foreign international," he said.
"We've got a great new manager in Roy Hodgson and he knows what he wants and he can talk these players into signing for our club.
"This is the signing supporters wanted and it's a big boost for them.
"You look at last season when we went into it not hoping but thinking we were going to win the league.
"This season people are thinking, 'Are we going to finish in the top four?'
"I think this sends a sign out to Liverpool supporters that the club do mean business."
European Cup-winning captain Phil Thompson believes Hodgson has pulled off a masterstroke.
"I think he has had a chat with Torres, met with Steven Gerrard and he'll have been saying to them 'We've got a chance of getting Joe Cole'," said the Reds' former assistant manager.
"Buying Joe will tell them all is not lost.
"Joe Cole has that bit of character. He can do something out of nothing and has the creative ability that Torres comes alive to - Gerrard too."
Already Liverpool have recruited two established internationals as Cole joins Serbia forward Milan Jovanovic, another free transfer, in boosting the club's attacking resources.
The positive thing for Hodgson is that they have yet to spend a penny on transfer fees.
That may be a sign of the times for Liverpool, who have a £351million debt and are currently up for sale.
But, although the club will undoubtedly have had to pay Cole the kind of salary - reportedly £90,000 a week - Chelsea were unwilling to agree to, it may be worth it in the long run.
With Yossi Benayoun having moved in the other direction earlier this month for £5.5million, the Reds already appear to be up on the exchange.
And not having to fork out significant fees means the comparably meagre funds Hodgson has available to him can be used elsewhere.
He is now likely to turn is attention to filling a hole at left-back with Emiliano Insua set for a move to Fiorentina and Fabio Aurelio having been released.
There is also a pressing need to strengthen the forward line to ease some of the pressure on Torres.