She was holding a baby in both arms.

Literal

She [topic-は] both-arms [in-に] baby [object-を] was-holding.

両腕 (りょううで, 'both arms') uses the 両~ prefix. 赤ん坊 (あかんぼう, 'baby') is slightly more casual than 赤ちゃん. 抱えていた uses the past progressive for an ongoing past state.