Kyrgios warmed up for the Australian Open which gets underway on Monday, by winning the Brisbane International.
The home favourite, who beat Grigor Dimitrov on the way to clinching the title, has been prone to petulant outbursts on the court in the past.
Federer meanwhile, who claimed the Hopman Cup with Belinda Bencic for Switzerland, enjoyed a stellar 2017, winning two Grand Slams to take his career haul to 19.
And the elder statesman thinks Kyrgios is an exceptional player, however he must maintain his focus if he wants to challenge for the first Grand Slam of the campaign.
“He’s (Kyrgios) going through his things, whatever he needs to go through,” Federer said.
“But when he’s on, he’s on and he’s really difficult to beat.
“It seems like he’s doing the right things otherwise he wouldn’t be winning tournaments, especially not in Brisbane because being able to cope with the pressure at home is not a simple thing.”
“I think he’s incredibly talented.”
Federer, who won the Australian Open last year, begins the defence of his title against Aljaz Bedene.
Kyrgios, who got to the quarter-finals of the tournament in 2015, faces Brazil’s Rogerio Dutra Silva in the first round.