Phelps, who is from St. Louis, will make his first start Thursday against the Royals in Kansas City.
With a day off scheduled for May 7, the Yankees only need one start from the No. 5 spot until veteran Andy Pettitte's possible return around May 10.
Used primarily as the team's long reliever, Phelps has thoroughly outpitched Garcia through the first month of the season. In four starts, Garcia lasted just 13 2/3 innings and his ERA was 12.51. He is 0-2.
"Like any of you guys, if you don't do your job, what you are supposed to do, that's what happens," Garcia said Sunday following a Saturday start in which he was lifted in the third inning after allowing six earned runs to Detroit. "I didn't pitch the way I'm supposed to pitch. That's the reality."
Phelps has thrown 17 2/3 innings out of the bullpen and has a 3.57 ERA and a WHIP of 1.08, which is better than any starter on the team.
"I envision him as a starter," Yankees manager Joe Girardi said of Phelps before Garcia was officially removed from the rotation. "I haven't seen anything that has told me he can't be a starter. Time will tell as we move forward."
Phelps, who pitched three scoreless innings Saturday, has replaced Garcia in three of his four starts. Against those same opponents, Phelps' ERA is 2.89, while Garcia's ERA is 15.75.
Phelps said that despite being a reliever all season his arm is stretched out enough for him to throw 85-100 pitches. He could start Thursday in Kansas City.
"I feel prepared to do it," Phelps, 25, said.
With Phelps and Garcia having pitched on Saturday, the Yankees added rookie D.J. Mitchell to their bullpen. Mitchell, who nearly beat Phelps for the long reliever role in spring training, was 2-1 with a 3.12 in four Triple-A starts. Reliever Cody Eppley was returned to Triple-A.
Meanwhile, Pettitte, who turns 40 in June, will take the mound for Class A Tampa on Monday. If all goes right, Pettitte may only have to make one more minor league start before returning to the Yankees.
Even before Sunday's demotion, Garcia didn't seem long for the rotation with Pettitte looming. In his career, the 35-year-old Garcia has only pitched twice out of the bullpen.
"I'll be a long reliever, whatever," Garcia said. "I'll be ready. Definitely, I'll be ready."
Garcia said he is healthy, despite the fact his fastball has been clocked a few miles per hour lower this season. Garcia threw mostly in the high 80s as he went 12-8 with a 3.62 ERA in 2011.
Phil Hughes also continues to struggle and could be the next starter to lose his rotation spot. Hughes has a 1-3 record and a 7.88 ERA to start the season.
The struggles of Garcia and Hughes have been highlighted given the recent season-ending injury to right-hander Michael Pineda and the struggles of the team's top pitching prospects.
Pineda, who was pegged for a rotation spot after being acquired in the blockbuster offseason deal that sent Jesus Montero to Seattle, will have shoulder surgery on Tuesday.
Manny Banuelos had a 10.13 ERA in two starts before going on the disabled list with a back injury, while Dellin Betances picked up his first win in five starts the other day, lowering his ERA to 7.25.