FIPS is a security standard; it stands for Federal Information Processing Standard.
If you enable a security policy setting that is FIPS-compliant you may have a lot of restrictions:
BitLocker will not allow creation or use of a recovery password The standard forbids this.
BitLocker will only release keys to be stored on USB flash drives
BitLocker Drive Encryption is currently supported/restricted to specific versions of Windows.
BitLocker will only offer FIPS approved methods of validation
BitLocker will only operate in its FIPS-mode once volume conversion (encryption) has completed and the volume is fully encrypted.
Practically, if you want to be FIPS-compliant you have to have encrypted the volume, then get rid of the recovery password. You will then have to use only one of the 2 protectors which are FIPS compliant: a data recovery agent or a recovery key for the volume.
Additionally, in the group policy for FIPS, you can disable the possibility of creation of recovery passwords.
If you do the above, you're FIPS compliant and you should enable "Use FIPS compliant algorithms for encryption, hashing, and signing". If you don't need to be FIPS compliant, you can use Bitlocker just fine and you don't need to restrict anything related.
The policy itself is not a requirement because you could correctly configure a FIPS compliant system without it being active, given you follow the FIPS compliance guidelines. But without that policy you could by mistake (and with high chance) configure something that does not comply with FIPS. The policy will prevent you to do that and will filter your choices (regarding algorithms, encryption, etc) so only the compliant ones will be available/displayed. That's the actual purpose of it.