The reason Holden came home was so that he could say goodbye to his sister. Luckily, his parents weren't home, and he is able to sneak in. Phoebe is thrilled to see Holden, but then realizes why he is there. He had flunked out again.
This is a very important scene for the novel because it presents both sides of Holden to the reader, and the title is made clear as well. He explains to his sister that he can't see himself being any kind of scientist or lawyer. The only thing he can see for his future is being a catcher in the rye--someone who watches over and protects young kids from any type of danger from the edge of a field of rye. This is both admitting that he is a failure and proving that he is sensitive to those who don't fit into society because they're either outcasts or powerless.
Phoebe understands this and begins to celebrate with him. They dance to about four songs on the radio, and then are surprised that her mother comes to her door. She saw Phoebe's light was on. Phoebe covers for him by telling her mother that she couldn't sleep, and the smoke she smells is from her smoking--but she only took one puff. Her mother is convinced and she leaves. This gets Holden off the hook, and he is able to sneak back out.
Phoebe does not reveal to her mother that her brother is hiding in the closet at the moment that she comes into the room. Nor does she tell her parents after he sneaks out of the apartment that he was home at all.
In fact Phoebe keeps Holden's secret about being in New York City before school is officially out for holiday break. Phoebe loves her brother and fears for him. She believes that their father will be very angry when he discovers that Holden flunked out of another school.
So even though Phoebe is also angry and disappointed with Holden, she does not tell her parents that he is in New York. She allows him to follow through on his own decision-making plans. Fortunately, Holden loves Phoebe enough to decide not to go out west to work on a ranch, but to go home instead.
Phoebe covers for Holden by not telling her mother Holden came back home, and the fact that he was currently in her room hiding in her closet. Another way she covered for him, was when her mother asked her about the smell of cigarette in her room (Holden was smoking when he was talking with her) she lied and said she took a little puff because of curiosity.