And yes, I am a little ticked that their offer was dealer cost not their cost.
It wasn't their fault the gun kaboomed. They already did a lot for you and ran the gun through the lab and narrowed the problem down to the ammo (something that would cost you hundreds of dollars if you sent it in to a lab on your own). They're giving you a very good deal on something that isn't their responsibility to fix. Think about it from their perspective.
I would definitely try to get something out of Federal as it very well could be their problem. However, there could be other issues out of their control as well. If this was ammo that was ever loaded into a gun, there's the possibility the bullet was overseated creating higher pressure. I'm not saying this is what happened, but I think you're in a losing, up hill battle. I'd say contact Federal, and do what you can do with them, but take S&W up on their very good, very generous offer (especially since Shields seem to be an endangered species right now).