No, that's the safety release valve.
If you're sure you're turning it the correct way (to the left) all the way, and as soon as you open up the cylinder you get air coming out of that valve, then yes, your regulator is shot.
However, what you describe is exactly what happens when people confuse "clockwise" and "counter-clockwise" (it happens embarrassingly often), so make sure you're turning it the correct way. And then, if you are, contact Milwaukee for a replacement.
One last thing - in the picture you show, the knob is turned all the way clockwise, which will maximize the working pressure (which you never want). To get minimal pressure, the knob will come outward, and then fall off when you go all the way out. I have a Milwaukee clone (a 3M) in front of me, and the position you have it in definitely causes max pressure.