In 1837 McCloskey returned to New York City and was appointed pastor of St. Joseph's Church on Sixth Avenue, serving there for seven years. In 1841, at Bishop John Hughes request, he organized St.John's College (now Fordham University) as its first president, then resigned after one year. In March 1844 he became an auxiliary bishop of New York under Bishop Hughes. McCloskey played an instrumental role in the conversion of former Brook Farmer Isaac Hecker, who later founded the Paulist order of priests, and of James Roosevelt Bayley, who later became archbishop of Baltimore.

In 1847 McCloskey was named the first bishop of Albany, New York. He was a dynamic church leader, constructing a cathedral, building a new seminary, and expanding the numbers of priests and churches in the bishopric. He took advantage of his location in the state capital to development relationships with important state politicians, such as Thurlow Weed, Rufus King, and Horatio Seymour. He also lobbied for the repeal of the Putnam Law, which prohibited Catholic bishops from bequeathing church property to their successors. Eventually the law was repealed.

In January 1864 Archbishop Huges died and McCloskey was appointed as his replacement. He administered completion of the new St. Patrick's Cathedral on Fifth Avenue, dedicating it in May 1879. He used his moral authority to caution his parishioners against involvement in the Fenian Movement, the revolutionary organization agitating for an independent Irish republic. He participated in the first Vatican Council (1869-1870) and formed part of the faction that opposed declaring the doctrine of papal infallibility, although he finally voted in favor of it.