I've read there is a password generator in the extension. Am I missing where it is? Is it not implemented yet?
It's for the third party apps, not the Safari extension. There isn't a way to generate a new password in the Safari extension just yet.
Basically, iOS 8 apps that integrate 1Password support can let users create a new password using 1Password and then have it stored in their 1Password database along with the other information such as the username.