The Fed could still kill off more zombie companies even after bankruptcies have spiked 54% since last year

• US bankruptcies soared 54% year-over-year in August.
• Societe Generale warned that more business failures could follow "beyond all fears."

• The Federal Reserve has hiked interest rates 11 times over the last 18 months, tightening financial conditions.

The Federal Reserve has embarked on one of the most aggressive monetary policy tightening campaigns ever, hiking interest rates 11 times over the last 18 months – and this high-rate environment and more expensive borrowing costs, according to Societe Generale, has sparked a wave of business failures that may continue to grow. 

In August, there were 634 commercial Chapter 11 bankruptcy filings registered in the US, data from Epiq Bankruptcy shows. That marked roughly a 54% jump compared to the 411 filings seen 12 months prior. 

"This 'new normal' certainly seems astonishingly abnormal to me," Societe Generale researcher Albert Edwards wrote in a note Thursday. "Yet if you look just below the very large-caps stocks, the old 'normal' still applies, with higher rates triggering a surge in corporate bankruptcies that will surely lay low the overall economy."

Mid- and small-cap companies appear to be in particular trouble compared to larger corporations. Edwards pointed out that these businesses are key drivers of the overall economy, especially with regards to employment, and more bankruptcies in this segment could prove dire.

Since the Great Financial Crisis ended more than a decade ago, years of quantitative easing, as well as widespread pandemic relief payments, have allowed companies with shaky balance sheets to survive and even thrive given the widespread availability of cheap debt.

In June, economists at the Federal Reserve published a paper that warned a historic surge in the percentage of distressed American companies could worsen the fallout from the central bank's inflation battle. Higher borrowing costs, they said, will bring pain to a huge number of businesses. 

"The share of nonfinancial firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s," Ander Perez-Orive and Yannick Timmer wrote. 

By their calculations at the time, about 37% of businesses were on the brink of going under.

Here's the economists again: 

"Our hypothesis is that following a policy tightening, access to external financing deteriorates more for firms that are in distress than for healthy firms, while following a policy easing, external financing conditions do not change appreciably enough for the two groups of firms to trigger a differential response."

In effect, they were saying that companies feel pain in times of policy tightening, especially those with weaker balance sheets. Yet at the same time, that doesn't mean pain goes away when policy loosens again. 

In any case, easy money measures have "kept so many zombie companies on life support," in Societe Generale's view. "[T]he recent sharp rise in rates really could cause a shocking rise in bankruptcies, beyond all fears."