A game is afoot immediately: "I am Odilo the Steward, the son of Odilo the Steward." Layers upon layers. The layers are mirrored in the storytellers. That is, the story has passed through at least two other tellers' mouths. Rumors/gossip (also second-hand stories) figure as well. "As I have often observed, rumor in our House Absolute is a self-willed wind..... the least gossip comes to a thousand ears." What is authenticity? Should we trust this (or perhaps any) tale?
Odilo is "charged by our Autarch Severian the Great--whose desires are the dreams of his subjects--with the well-being of the Hypogeum Apotropaic." [emphases mine] Dreams and well-being are connected here.
"I neither hope nor wish for other readers [than those "who know the ways of our House Absolute"]" This indicates this is meta-fiction, or a story about stories.
The story proper, which it takes some time to get to, is a rather simple horror story. The publication title above shows it is a celebration of horror published by the long-lived Weird Tales. Chatelaine Sancha is an apt pupil of Father Inire, watches his magical appurtences, and impetuously tosses in a gray cat. It disappears. She is involved in a sexual scandal, through no fault of her own, and goes to live in another kingdom to avoid the haunting gossip. A spectral cat follows her, not unlike the rumors that follow her, despite her attempts to thwart them. She eventually dies, with a paw print and a doll left behind.
The tale has horror, but how are we to feel about such horror? We have to page back to the beginning:
"I heard such recounting of larva, lemures and the like as would terrify every child in the Commonwealth--and make every man in it laugh most heartily.
"So I myself laughed when I returned here to my study, where I will scrutinize and doubtless approve..."
In other words, we should take a second look. Horror is not enough.