The Swiss, who has won the title seven times, will go on to face the winner of the second semi-final between Japan's world number five Kei Nishikori and Italy's Andreas Seppi.
World number two and top seed Federer needed two tie-breaks to claim a 13th win in 14 meetings with Karlovic.
The Croat, who stands 2.11m (6ft 11in) tall, had battered down 45 aces in his quarter-final victory against Czech Tomas Berdych on Friday but against Federer he managed a mere 21.
"I was very lucky in the first set and so I'm all the more delighted to be in the final again."
Federer is chasing a 15th title on grass as he warms up for Wimbledon, which begins on June 29.
He beat Nishikori in the semi-finals in Halle a year ago while he has only lost once in 12 previous meetings with Seppi, although that came in the third round of this year's Australian Open.
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