"How can she honor her mother (who will at some point perhaps need to live with her daughter as she ages), yet protect herself and her family? The daughter is a practicing Catholic."
This is a very disturbing situation, especially because the mother has already used her occult "gifts" on family members - a defenseless baby no less!
This is why my first recommendation is that your friend consult with a priest who is familiar with the occult (a local charismatic prayer group will probably know of one in your area) and seek counsel from him on how to handle this situation. He will also be able to advise her on how to remove any harmful bonds this medium might have established between occult forces and the baby.
In the meantime, she should take every step possible to protect herself and her loved ones from any occult influence that might be directed toward them by this medium. First, she should have her home formally blessed by a priest. Keep holy water and blessed salt in the house at all times and use them frequently. Blessed objects should also be present throughout the house. Be sure family members remain in a state of grace at all times (confession once a month, Eucharist once a week if not more) and be invested in the Brown Scapular of Our Lady of Mount Carmel in order to deepen their commitment to Our Lady and Her protection.
This blog will give you more detailed information on keeping the home safe and/or ridding it of evil.
Second, your friend should do everything in her power to convince her mother to leave this dangerous line of work. If this is not possible, and the mother refuses to repent and disassociate herself with these practices, some other living arrangements should be made for her. If she asks why, your friend should tell her the truth, but do so lovingly and with great compassion. There is always the chance that her honesty will touch a nerve that could bring this woman to repentance.
It's important to remember that if this woman has been dabbling in the occult for many years, these forces are controlling her. We all know the source of the only power that can take on the occult - Jesus Christ. Your friend should never hesitate to call upon Him for help and protection. He will not let her down!