I'm not sure what a Conservative Rabbi would do. Brava for both. I think you're going to have a lot of problems here. I assume you won't have the child baptized. I am uncertain of the Catholic Church's position on this, but I certainly do not believe it entails ostracism.
Protestants uphold the same.
Why can't Karen's husband and children derive their own meaning from Christian celebrations. It seems to me that it is strict observance to tradition that often creates an environment of intolerance. You obviously don't believe that. If you ask for advice, I don't have much. I suppose each category of religion in our public libraries should be completely sequestered by barbed wire.