The U.S. economy is gaining some strength but a stronger dollar has already tightened financial conditions and the Federal Reserve's first rate hike in nearly a decade will depend on incoming data, Fed Governor Lael Brainard said on Wednesday.

Improvement in the labor market, one of the Fed's key focus areas, has been "extremely steady" and slack in the economy has been reduced but core inflation is below target, Brainard, a voting member of the Federal Open Market Committee, said.

The U.S. central bank kept interest rates steady last week but left a December hike firmly in play, downplaying recent global financial market turmoil and arguing that the U.S. labor market was healing despite a slower pace of jobs growth.

The Fed has been hesitant in hiking rates but tried to dispel market scepticism about its plans last week, arguing that even slower hiring was still enough to get it closer to its goal of maximum employment and thus a rise in borrowing costs.

"There are certain aspects of the U.S. outlook that are encouraging. The improvement in the labor market has been extremely steady," said Brainard, who last month argued that the Fed should hold off until it was clear that a global slowdown would not push the U.S. recovery off course.

"There are still margins of slack in the U.S. labor force but we've certainly made some progress there," Brainard told a conference organized by the European Central Bank.

But wage growth has not been in line with the rise in employment, Brainard said, calling this trend puzzling. She noted that core inflation has remained below target and needed to be carefully monitored.

Brainard also singled out the dollar's appreciation over the past year, which has led to a "material" tightening of conditions.

"If you look at the cross currents, and one measure of those is the extent to which the currency has appreciated as expectations of divergence have grown, we have seen about 15 percent broad real appreciation in the exchange rate over the past year, which is a drag on prices and exports," she added.

"We've already seen by that measure some material tightening in the United States."