I am not merely allowed, but encouraged to work on whatever research I fancy. It's just that the school won't throw resources at me willy-nilly to do it.
Worse, I have to deal with my contracted teaching load first and do the research on the side. If I was at a prestigious, research institution that teaching load might be half-time or so, but I'm at a small, state university and the teaching load is 12 credit hours per semester.
So I am encouraged to do all the research I can with no money, no space1, no equipment2, no assistants3 and no release time. Thus the need for grant money.4
What the fellowship in question gives the recipient is not permission, but the resources to spend their time working on their project
1 Actually, with the remodel the state has recently funded this will soon be "very little space", yahoo!
2 Well, IT has been willing to give me an obsolete computer to use as a platform for the programming task that is stage one of a student project. But when a single-core, 4GB RAM, 500 GB storage computer with keyboard, mouse and monitor is a big step in equipping your corner of a shared lab you know things are tight.
3 I do have a number of in-major students who are interested in working with me, but that is more of a teaching obligation than a load off my shoulders because they still have so much to learn. But they can do a little bit of tedious stuff without close supervisions. And of course, they get more independent the longer we work together. And then they get a industry job or into grad school and I send them on their way and start looking for a new prospect.
4 So far this has really meant guiding the students through applying for the school's student research grant process and turned up a few hundred dollars a couple of times.