Freddy didn't have a great April, but since then he's been essentially what we would expect from him in a split starter/reliever role pitching to a 3.04 ERA over 47.1 innings while holding opponents to a .235/.281/.341 slash line. The only time he has given up more than three runs in an outing was in his last start in Oakland when he allowed four runs over 5.2 frames. Not really bad at all.
He has this thing where he gets into trouble early and allows a few runs, but he always settles down and finds a way to keep the team in the game, which is really all you can ask from a number five starter at this point in the season. He's filling in remember, and was basically their number six starter, so I'm not really sure what more you could want.
Now, I could see someone say that Phelps is younger with more upside and has a better chance to be a starter in the future and all of this is true. I'd love to have Phelps starting too, and I'm not really against it, but the bullpen has a need to fill at the moment, one that was exposed in Oakland. After Rafael Soriano, David Robertson, and Boone Logan, the Bombers only have match-up specialists back there in Cody Eppley, Chad Qualls, and Clay Rapada. Phelps provides an option that can give length and get both righties and lefties out.
Obviously Phelps could be an effective starter now, but he fills a need in the pen and is more effective in filling it than Garcia would be. Maybe when Joba Chamberlain is activated some time in the next week or two, they could put Phelps into the rotation and move Freddy back in the long man role, but even if they don't, there's no need to get worked up because the latter is doing a fine job.