You highlighted the problem already, though you may have missed it:
my wife continues to respect some traditions, if only because her family would look down on her if she didn't.
You guys sound like you're in your 20s. If so, I would suggest that people your age often have a hard time separating themselves from their parents - adult but not so adult that you're not still trying to win your parents' approval, and trying to prove you 'got it right' as far as their upbringing.
But the truth is, you ARE adults. This IS your family now. It IS your decision what you do with your children. The sooner you accept that, the less hassle and strain it will place on your marriage.
When we had our daughter, we didn't give her a middle name. Mainly because our last name is so complicated, we didn't want to saddle her with more than that. My stepmother let me know (and I was 31!) in no uncertain terms that her heart was broken (her words) because we're putting our daughter through a life of h&ll by not having a middle name, not to mention some sort of religious blasphemy she felt we were doing. I had to tell her that, while I respected her feelings, what we name our child was our own business and no one else's.
When you get married and have children, you're carrying on God's plan to start a new family of your own, with new traditions, if you so choose, your own rules, your own goals. Your parents' job was to raise you to adulthood; at that point, they are
supposed to back off and let you sink or swim.
But what often happens is what your wife is doing - still trying to win their approval by making decisions in alignment with theirs. You need to respectfully tell them you appreciate their concern, but that you will raise your children according to your own set of joint rules as husband and wife. You could point out to them that if they are secure in their belief that they did a good job raising you, they should be secure enough to know that you will do a good job raising your own children. You might even thank them for doing such a good job on the two of you (can't hurt!).
Finally, though, you need to make sure that you and your wife sit down and honestly talk through your feelings about your need to impress your parents, weighed against your belief in yourselves. I've seen many marriages falter because one of the two is not willing to let go of their need to impress their parents.
That said, if you do have a religious leaning, I'd urge you to consider starting to go to church with your kids. There is tons - and I mean tons - of research showing that kids who regularly go to church have extremely higher chances of excelling in life than those who don't. I don't necessarily mean because of the religious teaching they're getting, but because of the sense of community they get from the church - a community that is ALL about goodness, and honesty, and helpfulness, and humility...just tons of traits they'll pick up from that structure.
And don't think you have to stick with Catholicism. I know many people who have moved from the Catholic church to others, like Lutheran and Methodist, or the nondenominational ones that are popping up all over (though I would be careful of them). In fact, just yesterday, our friends came to our church, as they were in between churches. She was a Catholic, he was a Lutheran, and they'd been going to a Methodist church (he was thrilled to get to go back to a Lutheran church, LOL); but she liked it, too, and didn't feel compelled to have to go back to the Catholic church just because her family still does. You could make it a family event, to try out a new church once a month, til you find one that you get a good vibe off of.