Thiem fended off break-points chances in the deciding set and made his count with a forehand victor to go up 6-5, his nerveless power hitting proving too much for Federer.
The Pole, however, then started putting up more resistance on return and even had a pair of chances to get back on serve, but Federer snuffed out those opportunities and then clinched the match 6-4, 6-4 in one hour and 13 minutes.
Nadal and Federer were slated to meet for the 39th time on Saturday.
Indian Wells 2019
Nadal and Federer, who have 37 Grand Slam titles between them, have not played each another since 2017. "I$3 just came up against somebody who was, on the day, a bit better when it really mattered".
Notably, Federer has fallen short in the final at California desert for the second consecutive year.
"It's unreal", Thiem told the ATP website.
Thiem will also play in Miami, hoping to complete the "Sunshine Double" with a victory there after his Indian Wells win.
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Thiem earned the crucial break in the 11th game of the final set, connecting on two sharply angled passing winners off of Federer drop shots to give himself a break point which he converted with a stinging forehand victor.
The Spanish world No. 2 triumphed in identical tie-breaks 7-6 (2), 7-6 (2) but was forced to tape up his knee in the second set.
'It's tough against Roger, Rafa (Nadal), Novak (Djokovic),' Thiem said.
Thiem has never won a Masters 1000 title, losing in two previous finals.
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Following the conclusion of Indian Wells, both Federer and Thiem will now look forward to playing the Miami Masters next week. 'When he got up to the ball, stayed calm, made the shot'.
The Swiss great has won the last five in the series, but says that's of little significance now that it has been nearly a year and a half since their last meeting in the Shanghai Masters final in October 2017.
"We've had so many epic battles, and yes, I know that everyone we have now could be our last", Federer said. Fans who came to see Federer win another title on Sunday were disappointed, but few could begrudge Thiem his feel-good story. He was beaten in a third-set tiebreaker by Juan Martin del Potro in 2018. I had to fight to save those break points early in the second set.
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