The effect of modulation frequency on phase demodulation is analyzed in sinusoidal phase modulating (SPM) interferometry for displacement measurement. A rule for selecting modulation frequency is presented. The spectrum of interference signal is analyzed. It is found that when the displacement measurement range is narrow, small modulation frequency can meet the phase demodulation need; when the displacement measurement range is enlarged, modulation frequency has to be increased. Simulated data and experimental results indicate that with an λ/4 increase in amplitude of vibration to be measured, modulation frequency is required to increase to four times as frequency of vibration to be measured, where λ is the wavelength of light source.