A cost effective folded Fabry–Perot (F–P) interferometer is developed using a He–Ne laser source tuned by acousto-optic modulators (AOM). The two AOMs are employed to expand the frequency tuning range of the tracking He–Ne laser. The configuration and diffraction efficiency of each AOM is fully investigated to maintain balanced efficiency along the whole frequency tuning range. The optical phase modulated Pound–Drever–Hall frequency locking technique is employed in this system to minimize the locking error of the F–P cavity resonance. The displacement of the target corner cube reflector is converted to the tracking frequency change and measured by beating with an iodine-stabilized laser. A self-developed xPC target system is employed to accomplish the frequency locking, data acquisition, and air refractive index compensation in the overall system. A displacement comparison experiment between the F–P interferometer and a commercial interferometer shows the residual error is within ±4  nm in the range of 500 nm.