The narrator is visiting Holly in a hospital room, where she's been kept since getting arrested. He doesn't want to tell her about José's letter, but he can't lie to her when she asks if he's heard from him. The narrator doesn't hand over the letter right away, and he and Holly instead start talking about why she's in the hospital.
Holly tells the narrator that she's lost the baby, and this is when we hear about "the fat woman" (17.2) for the first time. Holly first sees this woman when Fred dies, and as she describes the lady to us and to the narrator, it becomes more clear that she's kind of a vision of death for Holly: "Right away I was wondering where he'd gone, what it meant, Fred dying; and then I saw her, she was there in the room with me, and she had Fred cradled in her arms, a fat mean red bitch rocking in a rocking chair with Fred on her lap and laughing like a brass band. The mockery of it! But it's all that's ahead for us, my friend: this comedienne waiting to give you the old razz" (17.2). It's the vision of this woman that makes Holly destroy everything in her apartment that night, and it's this same vision that haunts Holly when she first gets to the hospital. It seems that Holly was very close to dying as well.
The narrator finally gives José's letter to Holly, but in true Holly form, she doesn't want to read it until she can apply her makeup. After putting on her makeup, donning her earrings, and putting on her dark glasses, she grabs the letter and reads it in the hopes of getting some good news. As we know, she does not.
José tells Holly that he loves her but that he can't risk marrying a girl like her because of his political career. He tells her that he has "[his] family to protect, and [his] name, and [he is] a coward where those institutions enter" (17.8). He asks for her forgiveness, tells her that he's returned to Brazil, and tells her, "May God always be with you and your child" (17.8) (notice that he doesn't refer to the baby his child too).
Holly is understandably angry, especially because she really "did love him. The rat" (17.13). And then we find out that the physical exertion from the disastrous horseback ride is what causes her to lose the baby. In order to scare the police department, she pretends that the slap from the female detective is the cause, and she tells the narrator that she might "sue them on several counts, including false arrest" (17.14).
This is the first time Holly has mentioned the trouble she's in with the law, and the narrator is worried about her lack of plans. He wants to know what she is going to do to take care of things, and she tells him that she's still going to head to Brazil (not to follow José but because her ticket is already paid for – she might as well go).
He reminds her that she can't just leave town while she's "under a criminal indictment" (17.21) since she'll either get caught and get thrown in jail for the rest of her life or she'll "never be able to come home" (17.21). Holly isn't at all concerned about getting caught, and she doesn't want to cooperate with the police since they want her to testify against Sally, which she absolutely will not do either. She tells him that she can't hang around New York anymore since she's sort of damaged goods (so she won't be able to make a living "off [her] particular talents" (17.24). And she refuses to sit around and watch Mag shop at Tiffany's with Rusty's money.
Holly asks the narrator to go to her apartment and gather a few things for her trip, including the St. Christopher medal he gave her.