The railway power conditioner (RPC) based on the back-to-back modular multilevel converter (MMC), named multilevel hybrid RPC (MHRPC), was proposed to compensate for the power quality problems in traction power supply system (TPSS), such as negative sequence current, reactive power, and harmonics. Since TPSS is a 25 kV medium-voltage system, the phase-shifted pulsewidth modulation (PS-PWM) was chosen for MHRPC considering the number of submodules. However, the conventional PS-PWM suffers from higher distortion in output voltage or extra harmonics in circulating currents when applying to MHRPC. Various approaches were investigated to suppress harmonics, such as modified PWM methods, tailor-made filters, or additional transformers, but all increase control complexity or initial cost. In this article, a 2-D fast Fourier transform (FFT) harmonic model is developed to analyze how the phase displacement between stacks and legs impacts the harmonic distortion. Then an interpolated PS-PWM (IPS-PWM) is proposed, which sets the initial phase of carriers by coordinating four stacks of a single-phase MMC. It provides more output voltage stairs and eliminates the voltage unbalance states between the dc bus and two legs. Thus, MHRPC achieves better performance without extra hardware or increasing switching frequency. Simulation and experiment results verify the effectiveness of the proposed method.