The Swiss won 6-1 7-6 (7-0) to gain some measure of revenge for his defeat by Raonic in Paris nine days ago.
Federer joins Kei Nishikori at the top of the Group B table after the Japanese player earlier beat Andy Murray.
The second round of matches on Tuesday will see Federer take on Nishikori with Murray up against Canadian Raonic.
Federer remains in the hunt for the end-of-year number one ranking and will be keen to wrap up qualification for the semi-finals as quickly as possible.
He made an impressive start, dismantling the huge Raonic serve in the first set before edging a more competitive second to win in one hour and 28 minutes.
"I was very happy with how I performed and thanks for the ovation when I entered the building," Federer told the crowd afterwards.
"The second set was much tougher, it was an important set to win. I don't think he played a great breaker but it was a great one to win.
"It's a small relief, but we have a tough group here so it's always going to be hard advancing, but it brings me a step closer. I'm looking forward to playing Nishikori now."
The gulf in experience was vast, with the 23-year-old Raonic playing in the elite tournament for the first time up against a man making his 13th consecutive appearance.
Indeed, the first ever Canadian to qualify for the ATP Finals was just 11 years old when Federer made his debut in Shanghai in 2002.
Federer received the kind of raucous reception he experiences wherever he plays and went on to deliver the result most of the 17,000 spectators at the O2 Arena wanted.
Raonic, clearly keen to try and make his mark early, rushed the net at every opportunity in his opening service game and Federer picked him off to break.
The Canadian has hit more that 1,100 aces this year, and dropping serve so early was a heavy blow that he would not recover from in an opening set that raced by in 25 minutes.
A swift defeat was surely averted when Raonic saved a break point early in the second set with a smash, and Federer's progress was at least slowed.
The situation became potentially serious for the 17-time Grand Slam champion when he twice let 40-0 leads slip, and after saving break points at 2-2 and 3-3 he then had to fend off a set point in game 12.
It proved to be Raonic's last chance, however, as the tie-break went rapidly against him.
He clipped the tape with a forehand that flew out to lose the opening point on serve and Federer pressed home the advantage.
A double fault and a forehand error from Raonic left the Canadian 5-0 down, and moments later his challenge was over as another ball sailed over the baseline.
The 2nd set was a hot mess, but at least he redeemed himself in the tie-break. Hope he's sharper next round it only gets tougher from here.
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